Source: Commodities Wrap
By: Daniel Hynes
Date: Sept 11, 2022
Base metals recorded its best week since July as supply concerns boosted sentiment. On Friday, a sharp drop in the USD also provided some relief. High energy costs remain a threat to supply. Some aluminium smelters in Yunnan province, which accounts for over 12% of China’s production, may start reducing operating rates by 20-30% this month amid a drought-induced shortage of hydropower. This comes amid rising risks of disruptions in Europe. Based on current electricity prices, operating costs for some European zinc and aluminium smelters has increased two to three times over the past year, making them uneconomic. Overall, we estimate that approximately 1% of aluminium supply and 5% of zinc output is at risk of closure in Europe.
Sentiment in the iron ore and steel market improved as traders look ahead to stronger demand amid the peak construction season. Blast furnaces in China’s major steel hub of Tangshan have recovered after slumping in July as they met the ramp up in construction-related demand. This has been supported by signs of stabilisation in the Chinese property market. Nevertheless, there remains some doubt about this rally’s longevity as further lockdowns restrict economic activity.
A weaker USD helped reverse earlier losses in crude oil amid concerns of weaker demand. WTI hit a six-month low last week following further lockdowns across major cities in China. Fears of further Iranian crude on the market also eased. European leaders voiced serious doubts about Iran’s commitment to a new nuclear deal after almost 18 months of negotiations. France, Germany and the UK issued a statement criticising Tehran for escalating its nuclear program beyond what could be plausibly justified on civilian grounds. The US is exploring ways to head off tightness later this year. It raised the possibility of additional releases from its strategic crude oil reserves. A price cap on Russian oil continues to hang over the market. Russia’s president, Vladimir Putin, warned that the country would not supply energy to nations that back such a deal.
European natural gas futures fell last week as the European Union pushed for intervention in energy markets. EU energy ministers met in Brussels to discuss urgent steps to tame the price of gas. A windfall tax on energy providers was discussed, while some officials pushed for price caps on all imported gas. In the end, they agreed more work was required. They also stepped short of calling for a mandatory reduction in energy demand. The European Commission is expected to set out measures for legislation on market intervention this week. North Asian LNG futures edged higher on Friday but ended the week lower as export terminals prepare to start. Shell’s Prelude plant in Australia plans to resume exports this week. Additional Russian cargo is also headed for Asia.
European carbon followed energy markets lower. EUAs posted a loss of more than 15% last week, dropping to yet another six-month low on Friday despite some traders covering short positions ahead of the weekend. Sentiment remains weak as the market reacted to a proposal in the European Parliament to fast-track sales of EUAs from the market stability reserve.
Gold was largely unchanged las week amid expectations of another aggressive rate hike by the Fed. A weaker USD improved investor appetite.