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Metals inventories rise as China demand sinks, depressing prices - analysts

Inventories of major metal commodities have increased substantially in China in recent weeks amid falling demand from Chinese industry, leading to depressed prices, with little sign of any rapid change in the scenario, analysts reported Monday.

Copper, zinc and nickel inventories on the London Metal Exchange grew Monday.

The rise in stocks in China is mainly due to transport restrictions introduced to halt the spread of coronavirus, although there is also an element of seasonality due to a typical fall-off in production during the Lunar New Year period, analysts from BMO Capital Markets and ING Economics said.

Copper, zinc, aluminum, steel and iron ore inventories have all risen according to statistics and research, including from S&P Global Platts. Only a slow ramp-up in usage of stocked material was seen occurring following this week's official return to work for many Chinese facilities. However, some travel restrictions continue and companies are widely expected to adopt quarantine measure for workers.

LME prices for copper, zinc, aluminum, tin and lead prices all fell late last week, along with prices for some key steel products, with iron ore continuing a volatile trend downwards.

"For the most part, the coronavirus has seen commodity prices come under pressure, with demand implications out of China outweighing the effect of any supply disruptions," BMO analysts led by Colin Hamilton said. China is by far the world's biggest consumer of iron ore and copper.

Iron ore, steel

Iron ore prices have broadly continued to decline in recent weeks on sluggish Chinese demand, despite weather-related disruptions from Australia and Brazil trimming seaborne supply availability, according to Platts' research.

Chinese iron ore port inventories were cited by Shanghai Metals Market, or SMM, as having increased 1.96 mt, around 2%, in the week to February 7.

Chinese steel market inventories surged 35% from end-December to 12.38 million mt on January 17, the China Iron and Steel Association reported last week. Market sources said depressed demand would see inventories exceed last year's peak of 22.32 million mt by the end of this month, even as some mills announced steel production cuts of 20%-30% from March, partly due to the bringing forward of maintenance.

China's finished steel consumption in February could be up to 43 million mt lower than a year ago due to the virus outbreak closing down construction and manufacturing activity.

Zinc stocks surge on SHFE, LME

A large rise was seen on Friday in base metal stocks held in Shanghai Futures Exchange, or SHFE, warehouses. "We expect further build through the end of February at least. Social zinc inventories have essentially doubled since the pre-CNY period, though are roughly equivalent to the levels seen at this time last year," BMO said.

Zinc inventories have also grown on the London Metal Exchange, where a long-standing backwardation has flipped over into a contango market. LME zinc inventories rose 8,476 mt to 71,160 mt Monday.

A re-balancing of zinc markets -- already anticipated -- may have been brought forward by the coronavirus outbreak, as prices come under pressure amid the recent stock surge, ING's senior commodities strategist Wenyu Yao said. The zinc market had been strongly supported by a lack of stock-building over the past year, despite a mine supply surplus and strong production growth from China, Yao said.

"A broad bearish trend is likely to unfold sooner than later," the analyst said. "With short term demand stagnating, the galvanizing metal continues to pile up in warehouses."

Even if some Chinese zinc smelters cut their running rates due to lack of supplies of sulphuric acid amid logistics bottlenecks, this is unlikely "to defy the short term stock surge," ING said.

Copper stocks rise

SHFE copper stocks rose to 206,000 mt on February 7, above 200,000 mt for the first time since May 2019. Domestic aluminum inventories were at around 1 million mt compared to 1.5 million mt over the same period last year, the analysts said. On the LME, copper stocks rose 226 mt to 171,760 mt Monday.

Copper stocks rose despite operating rates at China's copper wire and cable fabricators dropping to 54% in January, down 15% year on year. This fall may be partly attributed to the impact of the Lunar New Year holiday, BMO said, citing a report by SMM. "February's figures are more likely to give a guide to the coronavirus impact, and with output deferred in many areas this may result in a further sequential reduction," BMO said.

Source: S&P Platts

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