Source: LME

A concise summary of what’s moving markets, the impact on base, precious and ferrous markets, including Theme of the Day.

What’s moving markets?

• Dovish reassurances from Fed officials are helping push global stock gauges higher but momentum is lacking. Fed officials pushed back against the idea that higher inflation would last long enough to put pressure on the US economic rebound. Governor Lael Brainard, Atlanta Fed President Raphael Bostic and St. Louis’s James Bullard all said that the price-growth momentum would prove temporary. The USD was weaker while bond yields moved lower ahead of US economic data releases later this week.
• The Chinese government has published an action plan to include a commodity price stability mechanism as part of the country’s 14th Five-Year Plan that runs from 2021 to 2025. The National Development and Reform Commission (NDRC), the country’s economic planning body, put forward a document named “Action plan to deepen the reform of pricing mechanism in the 14th Five-Year Plan” on Tuesday. “The supply and demand aspects of nonferrous metals have not changed, and the cost does not support such a large price increase,” a regulatory statement noted.
• Metal could be released from strategic stockpiles (SRB and provincial government) to cap price rises.
• Precious metals were all in positive territory as gold firmed for the ninth session in a row yesterday, rising towards the $1,900 mark, and at over a four-month peak, as Treasury yields continue to retreat while the negative sentiment around the USD and Bitcoin has lent further optimism to gold bulls. The PGMs outperformed gold and silver in a rising price environment.
• Zinc gained as LME stocks fell to their lowest since late-January and lead rose in sympathy, while the rest of the base metals complex continued to consolidate in narrow ranges after last week’s rout. Approaching month-end and ahead of the slow summer months the potential for further risk reduction cannot be ruled out, particularly as copper closed below key support at $9,900/t. Chilean copper producer Codelco has agreed a 36-month labour deal with unions representing management and employees at its headquarters in Santiago. The world’s largest copper producing company had offered no pay rises, but a bonus of 1.5mn Chilean pesos ($2,068) for those agreeing to the labour deal.   
• Iron ore rebounded despite new and more vocal messages from China, with bargain hunters from the physical community providing support. The NDRC said it will make plans to cope with abnormal price fluctuations for iron ore, while releasing a 5-year price mechanism reform plan. SHFE rebar and HRC were little changed.  

Theme of the Day: Substitution threat from high copper prices

• Could higher metals prices mean that increased demand will be met by a combination of increased recycling and/or primary supply, and is enough attention being paid to the risk of substitution associated with higher prices? As copper prices soar the threat from aluminium as a cheaper viable energy transmission alternative should not be ignored. Copper is a scarce resource, but there is an abundance of aluminium. Replacing copper with aluminium means that manufacturers material cost will be significantly lower and might shield against dramatic fluctuations in the metal markets.
• In the last supercycle, subsequent substitution in the form of switching, thrifting and “lost growth” led to the copper market losing 2% or 400-500kt per year of demand to aluminium when copper prices were above $6,614/t ($3/lb), according to estimates by Wood Mackenzie.
• The first aluminium transmission wires began to replace copper in the late 19th century. It is now the norm for overhead AC high-voltage lines. While aluminium’s conductivity is about 40% below that of copper it does possess attractive properties including its density, which is only 30% of that of copper. This means that an aluminium cable is around 52% of the weight of a copper cable with the same conductivity – giving handling and installation benefits.
• Aluminium is a serious competitor to copper in a number of high volume applications such as high- and mid-voltage power cables, busbars, transformer windings and motor windings. Adoption of aluminium magnet and auto wiring, air conditioner tubes and heat exchangers has steadily gained traction. In terms of economics and given its lower cost (both on an absolute basis and a price ratio of 1:4.2) aluminium is a winner under virtually any realistic long-term price scenario and especially amid forecasts of copper prices reaching $15,000/t and even higher (source: Wood Mackenzie).
• In the 1970s aluminium radiators began to take market share from copper/brass. The development of plastic-aluminium alloy radiators has taken this light weighting trend further. At the beginning of the last decade when the Cu:Al ratio was similarly elevated, there was significant lobbying in China so that in 2015 the NEA approved industry standards for the use of aluminium LV cables in buildings (source: Cape Noir).