Coronavirus crushes base metals demand, hefty surpluses weigh

May 13, 2020

LONDON (May 13) - Demand destruction caused by the COVID-19 pandemic will dwarf the impact of supply disruptions for industrial metals such as aluminium and zinc, leaving heavy surpluses and inventory levels that will pressure prices and output this year.

Bleak demand prospects have driven down base metal prices, cutting into revenues for producers, triggering capital expenditure cuts and the prospect of output reductions.

Miner and trader Glencore said last month its spending would fall by $1 billion-$1.5 billion this year from an original estimate of $5.5 billion, while Anglo American plans to cut expenditure by about $1 billion to $4-$4.5 billion.

Lower metals prices can benefit manufacturers as input costs fall, but typically only if they buy on the spot market as many deals are struck on a long-term basis.

Copper and nickel are expected to be the least affected as shrinking demand is likely to be offset to an extent by supply losses caused by lockdowns in producer countries, more than 10 analysts contacted by Reuters said.

Industrial metal prices have rallied since March, in response to expectations demand will recover as manufacturing activity in top consumer China resumes.

But industrial sources said quantities of produced goods have not been sold, which will eventually lead manufacturers to cut output and metals usage.

“Demand losses due to COVID-19 will outweigh supply disruptions,” ANZ analyst Soni Kumari said. “We see markets flipping into surplus for most metals against earlier estimates of undersupplied markets in 2020.”

ANZ expects aluminium demand to plummet 8% this year to 61.5 million tonnes and a surplus of 1.5 million tonnes, while Lais Santos from consultancy CRU sees a 8.8% drop and a surplus of 5.25 million tonnes.

A problem for aluminium is producers’ reluctance to cut output because of the punishing costs of stopping and restarting smelters and the boost to their margins from falling costs of inputs, including power, alumina and carbon.

“Aluminium is going to be an underperformer for some time, the vast bulk of the demand drop comes from outside China and is based on consumers being as slow to recover as they were in 2009-2010,” Citi analyst Max Layton said.

Meanwhile, zinc demand forecasts collected by Reuters vary from a 1% drop to a 15% slump, with the latter number from independent analyst Robin Bhar based on comparisons with the global financial crash more than a decade ago.

Demand this year for the metal used to galvanise steel is estimated at around 13 million tonnes and will rely on the extent of government spending on infrastructure projects to boost growth.

The outlook for copper is more positive as lost demand - forecasts range between 1.9% and 5.5% - is likely to be partly offset by lost production for the metal used widely in the power and construction industries.

The 23 million tonne market is likely to see a surplus around 400,000 tonnes this year from previous expectations for a balanced market.

However, the risks for copper demand are to the downside as industrial activity will remain subdued while the world grapples with the coronavirus and its aftermath.

“Without price-related cuts, copper faces considerable market surpluses over the next five years and the much vaunted medium term structural deficit story appears dead or at least pushed much further into the future,” CRU analyst Robert Edwards said.

The copper market has for some years fretted about deteriorating ore grades and a dearth of new projects.

For stainless steel material nickel, forecasts are for consumption to contract by around 5% to 2.3 million tonnes, partly balanced by supplies falling about 2%. This has helped boost nickel prices in recent weeks.

“The rally in nickel prices doesn’t reflect where nickel demand is currently heading,” said Citi analyst Oliver Nugent.


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