Center Valley, Pennsylvania 28/07/2016 - Weaker seasonal third-quarter base metals demand plus softer Chinese data could push prices lower after the recent rebound, JP Morgan said in a report.
The US bank's outlook for sequentially softer metals consumption in this quarter is based both on historical seasonality and its view that China's stronger-than-expected demand in the first half pulled demand forward, it said.
"Quarterly demand data over the past 20 years through 2015 show that, on average, metals demand has contracted between 0.5 percent and 5 percent in the third quarter across copper, aluminium, zinc and nickel," JP Morgan said.
"The main cause for this traditional slowdown is that production plants, construction sites and other metals consumers often reduce throughput or pause operations for holidays while stainless steel mills close for maintenance over the summer months, particularly in August," it added.
Meanwhile, JP Morgan expects Chinese housing data to deteriorate throughout the second half after peaking earlier this year.
Additionally, recent moves in the SHFE/LME arbitrage and physical premiums indicate that markets have already moved into the summer respite: the arbitrage window has closed for all four metals the bank tracks. Nickel imports into China are losing about $230 per tonne while copper and zinc arbitrage is averaging minus $50-$70 per tonne.
"The current rally in prices is putting further downward pressure on physical premiums. The Shanghai nickel CIF premium for SHFE-deliverable brands declined $30 per tonne in the last week alone, while copper premium for imported cathode has been trading in a range between $45 and $55 per tonne since April," it said.
In specific metals, copper prices should fall in the third quarter because slumping summer demand is likely to coincide with ramp-ups in production, increasing deliveries to LME-bonded warehouses.
"Simply put, we believe prices need to move lower to induce more supply adjustments; as such, we forecast that spot prices should dip to average $4,400 per tonne in the third quarter," said the bank, which also sees modestly lower prices for aluminium, nickel and zinc.
(Editing by Mark Shaw)