The Weekly W(rap): 14-May-2021: The inflation shock!

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Highlights of the week

  • As of 14 May, about 161.2mn Covid-19 cases have been confirmed worldwide, and the death toll has surpassed 3.35mn, according to Johns
    Hopkins University data.
  • Vaccine hesitancy is widespread in Europe, with more than a quarter of EU adults, and half of France, indicating that they are unlikely to accept a Covid-19 jab. Meanwhile, India’s daily Covid-19 death toll is still rising, accounting for 30% of average global deaths.
  • The WHO underlines faults in global Covid-19 response, including ‘lost month’ when countries failed to respond to WHO warnings.
  • The inflation shock ripples through markets.
  • Bulk shipping costs (Baltic Dry Index) at decade highs due to commodities boom.
  • Copper must rally 50% for supply to meet demand, says Glencore.
  • Iron ore surges above $200/t.
  • US jobs recovery shortfall in April.

Precious Metals

Gold came under heavy selling pressure, bottoming around $1,820/oz as a stronger USD and soaring Treasury yields after US inflation jumped
sharply and drove flows away from the non-yielding metal. Silver, as is usually the case, outperformed gold on the downside.

The rest of the precious metals complex was dragged lower as well, with palladium losing the most and falling below $2,900 in response to its sharp gains over the past few weeks taking prices above $3,000. However, the downside should be limited because of strengthening demand from the autos and electronics sectors, and a deep shortfall in supply. A decade-long consecutive years of deficits is drawing down above-ground inventories as buoyant offtake from the rebounding autos sector, as stricter emissions legislation offsets any weakness in vehicle production due to the chips shortage.

Similarly, platinum’s upward trend should remain intact for the same reasons and as automakers in China and North America start to switch to platinum from more expensive palladium in autocatalysts, along with new uses such as hydrogen fuel cells. Demand for platinum is also rising from other industries such as jewelry and as an investment. Demand for platinum in fuel cell electric vehicles (FCEVs) is currently being led by the heavy-duty vehicle segment, principally trucks, buses, and fleet vehicles.

However, developments in the FCEV passenger vehicle segment highlight that this market is also evolving, according to research from the World Platinum Investment Council (WPIC). Global FCEV car sales jumped 89.2%
YoY in Q121, hitting a record 4,000 units, with the Toyota Motor Corporation’s second-generation Mirai model leading the way. BMW, the
European automaker, is committed to the development of passenger FCEVs and has just this month tested a BMW X5 hydrogen fuel cell vehicle on public roads. The FCEV model boasts a drive train system – high-voltage battery and fuel cell combination – that delivers a total output of 275 kW (374 hp). FCEVs produce zero tail pipe emissions and, when fuelled by hydrogen produced from renewable sources, they offer a form of transport that is totally fossil-fuel free. FCEVs refuel quickly, in a way that is similar to gasoline or diesel vehicles and make for excellent passenger vehicles because they can travel 300-400 miles on a single tank. What is more, power output does not reduce when the weather is cold, a major consideration in regions that experience harsh winters.

Base Metals

The base metals sector was downbeat in the wake of the US inflation readings and risk reduction was the theme across the metals complex
as China lending growth slowed to CNY1.85tn in April from CNY3.3tn in March (but still the 2nd highest ever April recording of new Yuan loans
in CNY) and as Premier Li comments on the need to cap the commodity price surge (see Chart 3). A slowing credit impulse does not bode well for industrial metals as the Chinese government is unlikely to resort to more infrastructure spending because of the already high debt load. On a more positive note, any weakness in China could be mitigated by stronger growth in the US and Europe as “green” stimulus spending gets underway.

Buying the dips should support the downside on expectations of stronger for longer demand and potential supply hiccups. BHP wage negotiations (Escondida and Spence mines) adds further risks to an already strained copper supply, following shortages of sulphuric acid and a tax hike that could make new investment unattractive.

In Chile, the country’s lower house approved a flat 3% levy on both copper and lithium sales and also voted (by 78 to 55) to impose progressively higher tax rates on copper depending on what copper prices are doing. Proponents of the new taxes counter that the country would reap $7bn a year that could be spent domestically. The bill now goes to the Senate, but even if it were passed, the government is planning to use legal maneuvers to block its passage as it opposes the measure altogether. If approved, the new legislation would take effect in 2024. Chile’s mining association, Sonami, said that around 25% of Chile’s copper output would be at risk if the new tax goes into effect.

These supply-side issues are coming at a time when demand is rising
strongly. Other supply-side issues are also contributing to copper market tightness; capital expenditure remains soft, with the current pipeline
of mine projects the lowest since 2010. China’s 15 major copper smelters have agreed to cut copper concentrate purchases by 8.8% this year,
a reduction of 1.26Mt, or around 300kt measured by metal content. The smelters also agreed to increase the use of alternative raw materials
to boost revenue impacted by low TC/RCs. Glencore said copper prices need to rise to $15,000 to spur mine investments. CEO Ivan Glasenberg
said the mining industry would need to produce an extra 1Mt of copper a year to meet many governments’ goals of reaching net zero carbon
emissions, yet most of the world’s easy deposits had already been mined.

However, there are signs that demand is starting to soften. China’s
imports of refined copper fell from March’s high of 552kt, although were still up 5.1% YoY.

Constraints on China’s aluminium output, due to power generation and environmental issues, should support aluminium. With equities showing weakness on the back of raised inflation concerns it is not surprising that metals are on the back foot.

The metals have not had much of a correction to speak of, so we should now get an update on how bullish underlying sentiment really is, by seeing how far prices pull back and for how long. In spite of the correction, copper and tin are now officially in record territory as they wait for the other metals to catch up. Most of them have a long way to go, with aluminium being the closest

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