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China's Sliding Metals inventories Point to Higher Prices, V-Shaped Recovery

(Reuters, Clyde Russell) – One of the encouraging aspects for those hoping for a V- shaped economic recovery from the novel coronavirus in China has been the increase in the price and demand for many key metals.

There is a further aspect that supports the quick rebound thesis – falling Chinese inventories of many metals, from steel rebar to iron ore, copper, aluminium and zinc.

It's more than a coincidence that those metals have enjoyed solid price gains in recent weeks. And it's further worth noting that one of the metals where prices have lagged, nickel, also has seen rising inventories in recent weeks.

Of course, inventory levels aren't the only driver of metals prices. But they have been a reliable indicator of the trend in prices in China, even accounting for the usual pattern of seasonal stock builds and draws.

Shanghai copper futures ended last week at 47,320 yuan ($6,684) a tonne, the highest since early February. That was some 29.4% higher than the closing low this year on March 23, at the height of China's lockdowns as Beijing enforced measures to contain the spread of the coronavirus.

Copper stocks in Shanghai Futures Exchange (ShFE) warehouses dropped 14.2% to 109,969 tonnes in the week ended June 19, the lowest level since January 2019.

Copper inventories are down some 71% from this year's peak of 380,085 tonnes, reached in the week to March 13.

Given imports of unwrought copper are actually up 12.4% in the first five months of 2020 from the same period last year, and imports of copper ores and concentrates are 2.2% higher, the drawdown in inventories does suggest demand strength.

In aluminium, Shanghai three-month futures ended at 13,390 yuan a tonne last week. That's up 17.9% from the year low so far on April 2, but still 4.6% weaker than the end of last year.

ShFE aluminium inventories have been steadily declining as the price has risen, dropping from 533,994 tonnes in the week ended March 20 to 238,703 tonnes last week - the lowest level in five months.

Iron Ore, Steel

Iron ore inventories, as measured by consultants SteelHome, were at 108.35 million tonnes in the week to June 19, up slightly from 107.75 million the prior week, which was the lowest since October 2016.

Iron ore contracts traded on the Dalian Commodity Exchange ended last week at 770.5 yuan a tonne. That was down from the high this year of 777.5 yuan on June 8, but up 34% since the end of last year.

Meanwhile Steel rebar futures ended last week at 3,629 yuan a tonne, up 16.5% from the low so far this year hit in early February. The rally that has coincided with inventories dropping from 13 million tonnes in the week to March 13 to 7.15 million last week, the lowest in four months.

For zinc, Shanghai futures rose to 16,745 yuan a tonne last week, up 15.4% from the March 19 low, while inventories dropped to 96,796 tonnes. That level is down 43% from the high this year of 169,911 tonnes, reached in the week ended March 13.

The pattern is clear: falling metal inventories in China have been accompanied by rising prices. Where the inventories have been largely steady, or even increasing, it appears the price action has been muted as well.

For nickel, where inventories have stabilised, and actually rose 2.8% last week to 28,365 tonnes, the price has languished.

Shanghai nickel futures ended RECENTLY at 103,410 yuan a tonne, which is up 13.3% from an April 2 low. However, the price has been in a relatively narrow range since late April, mirroring the modest moves in the inventory levels.

While there are still some doubts over whether China, and the rest of the global economy, will stage a strong rebound from the coronavirus, right now the sliding inventories of many key metals in China are pointing to ongoing resilience in prices.

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