ESCALATING TRADE WOES SEND SHOCKWAVES THROUGH METALS

Commodity prices are facing headwinds, such as subdued growth, in key emerging economies of China and India. A brewing trade war between the United States and China, and a strengthening US dollar have made commodities more expensive for importing nations.

China’s manufacturing purchasing managers’ index (PMI) fell again in September, but industrial metals prices rose as the country’s anti-pollution measures are now likely to be applied less harshly. Meanwhile, the US-China tariffs were not as high as feared, which helped riskier assets, such as emerging market equities and industrial metals.

The International Monetary Fund recently downgraded the economic prospects of the US and China – the world’s two largest economies.

“Notwithstanding the present demand momentum, we have downgraded our 2019 US growth forecast owing to the recently enacted tariffs on a wide range of imports from China and China’s retaliation,” the IMF said.

“China’s expected 2019 growth is also marked down. Domestic Chinese policies are likely to prevent an even larger growth decline than the one we project, but at the cost of prolonging internal financial imbalances,” the fund added.

INDUSTRIAL METALS

Amid the prospects of slow growth, industrial metals were a mixed bag in September. Zinc was the star performer as it rallied on the back of further drops in stocks, along with the potential easing of Chinese anti-pollution curbs on heavy industry.

Zinc inventories in London Metal Exchange-registered warehouses fell below 200,000 tonnes, from more than 250,000 tonnes in August, and are nearing 10-year lows. The fall has helped the commodity surge 17% to USD 2,678 a tonne, since its 22-month low in August.

A major sell-off in zinc prices from USD 3,575 per tonne in February to USD 2,300 per tonne by mid-September (-35%) saw Chinese zinc producers step in and restrict output, while consumers start to build refined stocks.

By the end of June, a number of large Chinese smelters had committed to cutting production by 10% and appear to be following through on this threat, with year-on-year output declining 6% over the two months to August, domestic and bonded stocks drawing down sharply, and bonded premiums spiking.

The 6% rebound in copper to USD 6,200 per tonne from its early September low of USD 5,800 per tonne has been accompanied by several tightening physical indicators, especially in China. Chinese bonded copper premiums have increased at a pace only matched twice in the last five years, to USD 120 per tonne, robust Chinese spot premiums are incentivising a drawdown of bonded stocks, and SHFE and LME curves have tightened.

Trackable global copper inventories in days of consumption have fallen to their lowest levels in nine years, and are drawing at a faster than normal pace for this time of year. Furthermore, this is not just Chinese consumer stocking – as initially thought – following the collapse in prices from USD 7,300 per tonne in June.

Aluminium is also emerging as a US-China trade story, especially after the Asian giant boosted tax rebates on the metal’s export to offset the impact of the US tariffs.

Last month, China increased its rebate on value added tax (VAT) for exports of semi-fabricated aluminium, or semis, to 16% from 13%, senior analyst Greg Wittbecker of consultancy CRU told Reuters.

PRECIOUS METALS

Palladium was one of the best performers last month as part of a relief rally associated with lower than expected impact of US tariffs on China. Palladium was trading at USD 1,079.40 per ounce, and appear to have better fundamentals than gold, surging 27% from a year-to-date low of USD 845.60 in August.

Gold prices briefly hit USD 1,200 per troy ounce in September but have retreated below that figure amid pressure from a stronger dollar and a higher US interest rate outlook.

“The selling interest is being limited by the shaky stock market worldwide and strength of the dollar is limiting the upside,” said Kitco Metals senior analyst Jim Wyckoff, as reported by Reuters.

Higher interest rates boost the dollar and push bond yields up, putting pressure on gold by increasing the opportunity cost of holding non-yielding bullion.

Against a basket of major currencies, the greenback hit a seven-week high, boosted by rising US bond yields.

The yellow metal has been trading in a USD 30 range over the past 50 days, which suggests that investors continue to seek a safe haven in the midst of economic growth in emerging markets and inflationary pressure from soaring oil prices.