Cygnet Commodity Market Update, May 2022

Cygnet Commodity Market April 2022

Copper prices fall in April, as lockdowns start to take their toll

The past month has seen bearish sentiment return to financial markets as the war in Europe rumbles on and the economic clouds darken.

Of particular concern for commodities are the extensive lockdowns in China, due to fresh Covid outbreaks and the US’s surprisingly weak GDP in Q1, with a 1.4% drop. As a result, the S&P500 equity index was down by 10% in April, while the USD strengthened to reach a 20-year high.

Despite this backdrop, 2022 has seen most major industrial commodity prices rallying, as fear about shortages due to sanctions on Russia has outweighed other more bearish factors.

April saw the strength from the first quarter extending. US natural gas prices were up by 29% for the month, and thermal coal prices in South Africa were up 16% m/m.

Nickel and palladium increased 4% and 5% respectively m/m, due to Russia’s important position as a supplier.

Commodity Market YTD 2022

Weak copper prices may be an early sign that the peak in commodity prices may be close. Copper prices fell back in April by 6%, as concerns about weak demand more than offset any concerns about supply.

Prices are little changed so far this year, despite Russia being responsible for around 4% of global production. Russian exports of copper are also significant and typically are around 700kt per year of copper cathode and 150kt of copper wire.

So why has copper not rallied along with other commodities? One reason is that the LME inventory levels have been trending up from a low level, potentially flagging up an oversupply. On-warrant LME stocks rose from 66kt at the end of March to 102kt by the end of April.

Copper treatment charges (TCs) are also trending up, supporting the bearish narrative and indicating that smelters are gaining the upper hand over miners as more copper concentrate becomes available due to new mine start-ups and lacklustre demand.

According to data from Fastmarkets, copper TCs reached USD81/t in late April, up from USD66/t in March. While traditional mining areas such as Chile and Peru are struggling, countries such as the Democratic Republic of Congo and Indonesia are seeing rapid growth.

The biggest concern in terms of copper demand is China, which accounts for more than half the global total. Economic activity has been hit in the country by a series of strict lockdowns, which has impacted areas such as Shenzhen – a key manufacturing location – and cities such as Beijing and Shanghai. At the start of May, at least 27 cities were in full or partial lockdown, affecting up to 180 million people.

As a result, the official manufacturing PMI fell to 47.4 in April, from 49.5 in March. Softer demand meant the country needed to import less copper, and consequently, imports fell by 9% y/y in March. Furthermore, domestic production is ramping up, rising 7% y/y in the same month.

China should see economic activity improve in the second half of this year, which will underpin copper prices. The government is concerned about the pace of growth and is likely to boost spending on infrastructure. Interest rates have also been cut to provide extra stimulus.

Nevertheless, the second quarter of this year looks to have started badly.
In the months ahead, we expect commodity markets to remain volatile as markets struggle to forecast unpredictable factors such as the war in Europe and the path of inflation amid a squeeze on consumer incomes in the OECD countries.

However, weak copper prices suggest that markets may be heading for another fall in the second half of this year, although a lot depends on the path of China, as it struggles to emerge from its Covid-related slowdown.