- A confluence of factors is pushing bears to cover their shorts
- Supply disruptions are coming thick and fast
- The jury is out on whether supply cuts can counter the demand shock from the virus
Base metals prices are showing signs of firming as the collapse in demand due to the coronavirus is being offset by a cut in supplies from mine closures.
In Zambia, Glencore plans to shut its copper mines for three months. “In addition to the impacts of a rapid decline in the copper price, Mopani’s situation has been further impacted by the critical disruptions to international mobility, transportation and supply chains arising from COVID-19,” the company said.
In an example of transportation dislocation, the lockdown at South Africa’s forced many copper miners to reroute their metal to Tanzania’s Dar es Salaam port. South African ports have since started accepting shipments, however.
On the LME, base metal prices closed higher on Tuesday, April 7, aided by reports that the severity of the virus was on the decline. The number of deaths and new infections from the coronavirus trended lower in countries including France, Italy, and Spain.
Other reports referred to the possibility of China returning to the market as it limped back on the gradual lifting of lockdowns. The market also welcomed positive factory data from the country.
Moreover, mine closures across the world due to still-in-force lockdowns and social distancing measures are also inhibiting supplies.
Fastmarkets research analyst Andy Farida said: “The overall feel is that there is some bearish exhaustion across the LME base metals complex and market participants are mindful not to push too hard to the downside.”
Meanwhile, data is showing that stocks of copper in LME-approved warehouses have been steadily declining. They hit this year’s high of 220,325 tonnes on March 17, 2017.
Again, countries are quickly rolling out heavy-hitter stimulus packages to counter the recessionary effects of the virus. Following on the heels of the $2 trillion package from the U.S. is the latest announcement from Japan of a near $1 trillion stimulus. These moves could trigger an infrastructure-led recovery.
The combination of these factors may have triggered short-covering.
According to reports, funds have slashed short positions from a mid-February peak of just over 100,000 contracts to 53,642 now.
According to the Financial Times, which quoted analysts at UBS, about 15% of the world’s copper mines, and 20% of zinc mines, are now offline or operating at reduced capacity due to a collapse in demand amidst the virus crisis.
The supply cuts may have offset the demand shock to some extent.
Copper producer Antofagasta plc said it would suspend operations at its Los Pelambres Expansion project in Chile for four months. Further, the Mexican government has ordered all ‘non-essential’ business activities in the country to cease, including mining, until April 30, to curb the spread of the COVID-19 virus. This will impact the production of silver for industrial uses.
Turkish company Tugcelik Aluminyum said it would halt operations at its Dudullu plant for 15 days. According to a report from Fastmarkets, the pandemic would likely put paid to a lot of global aluminum smelting capacity that was already struggling from tariffs and a structural oversupply.
But will it be enough?
According to analysts, metals supply is still likely to overwhelm demand. “The demand destruction of 156,000 of copper per week far outweighs the current 60,000 of COVID-19-related supply disruptions,” says Tyler Broda, an analyst at RBC Capital Markets, in respect of the bellwether base metal.