Column: Metal markets brace for another downturn

LONDON Oct. 27 (Reuters) – The specter of a recession hung heavy this year during the London Metal Exchange (LME) Week festivities.

Analysts agree that the European manufacturing sector is already shrinking and that the United States may follow.

Demand forecasts have been lowered. The International Lead and Zinc Study Group (ILZSG) now expects global zinc use to contract by 1.9% this year. At its April meeting, it expected growth of 1.6%.

The International Nickel Study Group has lowered its global demand forecast from 8.6% in May to 4.2%, reflecting a decline in stainless steel production.

Significant amounts of aluminum are already showing up in LME warehouses as supply chain inventories dwindle.

The LME Index (.LMEX), a basket of base metals, has gone from boom to bust in no time, collapsing 29% from its all-time high in March.

But this downturn has been accompanied by three unusual features that have combined to create an intoxicating cocktail of uncertainty.


The status of Russian metal was a major topic of conversation during the many seminars and parties in London this week.

Should the LME suspend supplies of Russian aluminum, copper and nickel or should it maintain its policy not to prejudge official sanctions?

Battle lines are drawn.

German copper producer Aurubis (NAFG.DE) and US aluminum producer Alcoa (AA.N) have publicly called for an LME ban on Russian metal. Norwegian Hydro (NHY.OL) wants government sanctions.

European aluminum consumer group FACE wants the European Commission to step in to prevent a ban, saying it would “risk the destruction of Europe’s independent downstream aluminum industry”.

The deadline for responses to the LME’s discussion paper is Friday.

There is a lot of metal stock at stake here. Rusal produces nearly four million tons of aluminum annually.

Nornickel accounts for approximately 7% of the global nickel supply and, critically important to the LME, is a major supplier of the Class I metal that can be supplied against the exchange’s contract.

Russia last year produced 920,000 tons of refined copper, about 3.5% of the world’s total, according to the US Geological Survey.

An LME ban on supplies of Russian metal would clearly have a significant impact on both LME and physical market prices. More government sanctions would have an even greater impact.

Zinc and lead markets expected to continue to run short of inventories in 2023 SMELTER PROBLEMS, LOW INVENTORIES

The second quirk is that the price drop comes at a time when the supply of many metals is still very much under pressure.

Europe has already lost more than a million tons of aluminum smelting capacity due to high energy prices and is likely to lose even more as power price hedges mature.

The impact on the aluminum price was dampened by the simultaneous decline in spot demand and an aggressive ramp-up of production in China in the first half of the year.

However, China’s aluminum smelters also face constraints, especially those in drought-stricken Yunnan hydropower province, an emerging hub of “green” metal production.

The smelter bottleneck is most acute in zinc, due to both European power-related restrictions and a range of problems at other smelters around the world. Canada’s CEZ just joined the list and announced it will close for preventive cell maintenance by the end of the month. It doesn’t know yet when it will come back.

The ILZSG predicts another year of supply shortages for both zinc and lead next year as smelter availability reduces the flow of extracted concentrate.

The outlook is for continued high physical premiums, particularly in Europe and North America, and no rebuilding of depleted stocks.

Copper is least affected by the energy crisis and there is broad consensus among analysts on The International Copper Study Group (ICSG) forecast that the global market for refined products will move from a supply shortage to a surplus of 155,000 tons next year .

However, the modest size of that surplus is likely to keep supply tight and, like zinc and lead, do nothing to replenish depleted visible supplies.

The conundrum of low price and low inventory looks set to continue for a while and it will become more acute if the LME were to restrict supplies of Russian metal.


While its sister organizations lowered their demand forecasts for lead, nickel and zinc, the ICSG has increased its estimate of demand growth for this year from 1.9% to 2.2%.

China’s strong imports of refined copper this year have boosted the ICSG’s apparent use calculation to 2.5%. Imports are likely to accelerate further given the decline in bonded warehousing stocks and the resulting super high import premium.

The country’s hunger for copper seems abnormal given the well-recognized problems in the real estate sector, an important part of China’s demand for copper.

However, it seems that copper use, at least in China, is now finding an additional driver in the form of government investment in green transition technology.

The much-hyped green booster may finally be coming and it begs the interesting question of whether Doctor Copper will maintain its price relationship with the broader economic cycle or align more with the decarbonization cycle.

This is already happening in nickel. Although the use in electric vehicle batteries is still small compared to the stainless steel sector, it is growing faster and playing an increasingly important role in the global market structure.

The high energy prices that are driving up both metal producers and consumers will accelerate the green transition as Europe strives to reduce its reliance on Russian fossil fuels.

That means even more government funding for renewable generation capacity and for subsidies for electric vehicles, bringing forward both the energy transition timetable and the use of the metals needed to achieve it.


The world will need much more metal to meet its CO2 reduction targets. Unfortunately, current prices are too low to encourage the necessary investment in new mining and smelting capacity.

It’s a big conundrum that can be added to the puzzling mix of bearish outright prices, existing supply disruptions, possible Russian supply disruptions and, in several cases, critically low stock market stock.

Confused? Do not worry. Just about everyone in London was like that this week.

The opinions expressed here are those of the author, a columnist for Reuters.

Editing by Kirsten Donovan

Our Standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias under the Trust Principles.

Andy Home

Thomson Reuters

Senior metals columnist who previously covered industrial metals markets for Metals Week and was EMEA commodities editor at Knight-Ridder (later Bridge). Started Metals Insider in 2003 and sold it to Thomson Reuters in 2008. He is the author of ‘Siberian Dreams’ (2006) about the Russian Arctic.

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