Singapore 08/07/2016 - Heavy rains and flooding in parts of China have resulted in transport delays for some metals producers, with the impact most pronounced for aluminium due to the already-tight domestic spot market.
Rail shipments of aluminium ingots from smelters in the northwest to southern and eastern China are being postponed due to the bad weather and floods, sources said.
"Aluminium stocks are already low in the market. A delay in shipments by just two or three days will exacerbate the supply tightness," a Shanghai-based aluminium analyst said.
Chinese aluminium inventory in five major Chinese cities - Shanghai, Wuxi, Hangzhou, Gongyi and Nanhai - at 292,000 tonnes at July 7, according to Shanghai Metals Market estimates, was down 21,000 tonnes from the previous week. Stocks have dropped 67 percent from the first-half peak of 928,000 tonnes in the week of March 14.
The tightening supply continues to provide support to SHFE aluminium prices, with the backwardation in the spread between the SHFE July contract and the September contract widening to and staying above 400 yuan since Wednesday. The spread between the two contracts was at 450 yuan at Friday's close.
SHFE aluminium has been in a backwardation since late-April on tightening spot domestic supply following production cuts among smelters since late last year and slower-than-expected restarts by those smelters so far this year.
Although the floods have had limited impact on production from major metal smelters so far, they have caused transport delays for end-products and raw materials, sources said.
"The heavy rains have some impact on [copper] cathode sales in Wuhan and Nanjing. It's hard to transport the output," a source from a major copper smelter said.
DEMAND IMPACT
But near-term copper metal demand could be affected, market participants said, because several downstream copper fabricators have reportedly been forced to shutter production.
Southern and eastern China are two regions heavily affected by the rains; both are major metal-consuming regions, home to many downstream producers.
"We understand a number of copper cable producers are affected and have halted production. If downstream producers have to cut production, copper metal demand will be affected," a Shanghai-based copper analyst said.
And with demand already slow during the off-peak season, which typically runs from June to August, stoppages among copper fabricators will weigh further on demand that is already weak, he added.
It is difficult to quantify the near-term impact on demand because the extent of the damage to and stoppages at factories is not yet known, industry participants said.
There are also concerns that there will be more rains - Typhoon Nepartak is set to arrive in China's Fujian and Zhejiang provinces on Friday.
But production stoppages among copper fabricators now could mean a demand boom later in the year as orders are pushed back, sources added, possibly coinciding with the peak demand season during September-October.
Rebuilding and construction work after the floods will also be positive for metals demand on the whole, a Guangzhou-based metals analyst added.
The effect of the floods on SHFE copper prices have been muted so far because global macroeconomic conditions are taking precedence, industry watchers said. The SHFE September copper contract closed 290 yuan lower at 36,620 yuan on Friday.
The heavy rains and flooding in southern, eastern and central China for over a week affected an estimated 32 million people in 26 provinces. More than 180 people have died while 1.4 million people have been forced to evacuate their homes.
(Additional reporting by Meimei Qin and Ian Walker)