PHYSICALS WEEKLY - Summer nears end with weak premiums, lingering supply fears

London 30/08/2016 - Physical metal markets participants had better be enjoying the last rays of summer sun because the fast-approaching mating season is shaping up to be a gloomy affair.

Spot premiums were mostly static this week but the bias in most metals and regions remains firmly to the downside due to global oversupply and uncertain near-term demand.

The aluminium sector, in particular, is now facing a major problem. There is currently anywhere between 10 million and 16 million tonnes in above-ground inventories; the deterioration of London Metal Exchange spreads and higher interest rates mean that it is no longer that easy to finance metal.

Although global demand remains decent, there is simply not enough consumption to absorb the high inventories and overproduction in China. So it is not that surprising that premiums remain at quite depressed levels in all regions.

Copper premiums were steady in Europe and Asia and slightly lower in the US but all the talk now centres on continued deliveries of Chinese material to LME-listed warehouses - more than 60,000 tonnes have arrived in the past six trading days.

"Metal is appearing in warehouses all over the world - it's very clear the market is in surplus," a US copper trader told FastMarkets.

Activity in zinc was exceptionally quiet - the rally in LME prices has pushed most consumers to the sidelines - while nickel, lead and tin were mostly neglected. 

ALUMINIUM SINKS TO 7-YR LOW IN US, Q4 MJP OFFER AT $82/T

• The US Midwest premium fell to a seven-year low of 5.75-6.25 cents per pound this week from 6.0-6.5 cents - record imports and a lacklustre LME contango forced some stock liquidation.
• "A lot of these [long-term financing] deals are now expiring. What are people going to do with that metal? The contango isn't good so they can't roll it over. So they will either sell to consumers at low premiums or they can put it [on the LME] - that's what happened with the recent delivery into Detroit" - US trader.
• Demand in the US has also shown signs of cracking. Aluminium extrusion and sheet and plate shipments were down seven percent and 4.6 percent respectively year-on-year in July. And the Aluminum Association's index of net new orders of aluminium mill products for July fell 9.9 percent from the previous month.
• Automotive sales are also starting to level off after six years of explosive growth. Light vehicle sales rose just 0.7 percent in July to 1.52 million units, according to Autodata, but some of the biggest carmakers struggled - sales slipped three percent at Ford, four percent at General Motors and 1.4 percent at Toyota.
• Meanwhile, fourth-quarter supply negotiations have kicked off in Japan with an initial offer of $82 per tonne on a cost, insurance and freight basis to major Japanese ports (CIF MJP) from one producer so far. This is down 10 percent from $90-93 per tonne agreed for the third-quarter benchmark.
• But spot premiums in Japan are trading a good deal lower at $65-75 per tonne on average in thin buying; market participants expect a fourth-quarter settlement in the $70s.
• Markets in Asia remain subdued - producers are willing to offer large clips to the market at low rates.
• "Lots of metal is on offer, it's coming from everywhere and many producers are long, which is pushing metal into clearing in Asia" - trader.
• Brokers can pick up warrants in Singapore for zero premium via LME clearing.
• Spot CIF premiums for ingots in South Korea remain at $55-65 per tonne, with the country's Public Procurement Service buying duty-free aluminium for $60.5-64.3 per tonne today.
• Australian, Indian and Canadian units have for the past year qualified for zero-duty imports into South Korea and have gradually displaced other brands, which are now looking for homes elsewhere across the continent, sources said.
• "No sane person would take a tonne of metal into Korea at the moment" - second trader.
• Premiums in Europe are unchanged in Rotterdam at $110-120 per tonne duty-paid in-warehouse but have edged higher in Italy. Premiums in Italy traded this week at $155-165 per tonne duty paid free carrier agreement (DP FCA).
• "This year demand has been quite good. Automotive is still the best performer, extrusions are patchy but the rolling plants are running quite well" - seller in market.

US COPPER PREMIUMS SLIDE FURTHER, CHINA MONITORS ARB

• US copper premiums slid to a fresh five-month low below 6.0 cents this week while rates remained around bottom in other locations, with China monitoring a slight improvement in the LME-SHFE arbitrage.
• The US Midwest delivered copper premium fell to 5.25-5.75 cents per pound from 5.5-6.0 cents - higher Comex prices earlier this month freed up some scrap that was previously in tight hands.
• Comex prices have since retreated in line with the LME but "people are well covered for the summer - no one will be picking up spot [cathode] units until October" - US trader.
• "We hear that the order books for [US tube producers] aren't quite as strong as they were two months ago. So even if scrap gets tight again, there might not be the same rush to replace with primary" - US trader.
• In Shanghai, premiums held at $40-50 per tonne in bonded-warehouse but dropped slightly to $35-50 CIF due to isolated parcels for September delivery being liquidated.
• The arbitrage between LME and SHFE prices, which has been negative for most of this year, showed signs of improvement and kept traders on the alert.
• "It's almost open and we could see a window soon for more imports and better premiums" - European trader.
• Attention also remained on continued deliveries of Chinese stocks into LME-listed warehouses in South Korea and Singapore, with more expected in the coming month - especially from a smelter in the north of China and a Swiss trader.
• LME warehouse incentives have declined in South Korea, however, causing CIF premiums there to ease by $5 to $45-55.
• In Rotterdam, premiums were static around $50 CIF while plants slowly reopen after the summer break. The focus has already started to turn to annual premium negotiations, which in Europe typically conclude at the start of LME Week. This year the event takes place over the last days in October.

ZINC FLAT, TIGHT SPREADS WIPE OUT INTEREST

• Zinc premiums were stable this week across Europe, Asia and the US. The market is watching for whether higher Hindustan Zinc output will weigh on Southeast Asian markets.
• Spot rates in Shanghai were stable at $90-110 per tonne CIF while there is a huge gap between offers and bids - enquiries have not led to actual trades due to the closed LME-SHFE arbitrage.
• Some traders got offers as low as $85 per tonne CIF Shanghai but others received offers as high as $130, reflecting illiquidity in the spot market.
• "Still, business is not very smooth because of the poor arbitrage and God knows when that will be open in the fourth quarter" - trader in Shanghai.
• In Southeast Asia, rates were unchanged at $90-100; some think that premiums will be under pressure due to increased supply.
• "Hindustan Zinc are exporting their ingots to nearby markets while other traders are also offering... we might see rates drop in Vietnam or Thailand" - second trader.
• In Europe, premiums in Rotterdam were last quoted at $130-140 per tonne FCA, a level that they have maintained for four months.  
• On the LME spreads, cash/threes was last at $3 while cash/September held at $6.
• "With the tight spreads, not many people would be willing to buy and traders have faced difficulties to sell" - European trader.
• The US premium for special high-grade (SHG) zinc was unchanged this week at 6.5-7.0 cents per pound but spot business was particularly light due to the forthcoming Labor Day holiday and the high LME price.

LEAD RATES STABLE, RENEWED INTEREST FROM EUROPE

• Lead premiums have been subdued over the past few weeks although there is some renewed interest from European customers.
• Premiums in Rotterdam were last at $60-70 per tonne duty-paid FCA for 99.97-percent-purity material.
• "We have some small European consumers showing interest after coming back from holiday but I guess they are just checking out prices to see where the market is" - European trading source. 

NICKEL PREMIUMS DIP IN ASIA, FOCUS ON ARB; STABLE IN EUROPE

• Spot nickel premiums in Shanghai edged lower to $80-100 for SHFE-deliverable and $70-90 for SHFE-non-deliverable material over the past week but this is an indicative range - no deals were reported this week due to a huge gap between offers and bids.
• "We want to buy at parity for Russian brands but there are no offers and we offered at $100-130 but there are no takers" - trader in China.
• The LME-SHFE arbitrage window has improved but remains negative, incurring a loss of more than 1,000 yuan per tonne on imports on Tuesday.
• "I won't consider any deal as long as the arbitrage is negative - it still makes a loss" - second trader in Shanghai.
• But there is speculation among market participants that the arbitrage window might open soon if the drop in LME prices continues - the impact from the Philippines mining crackdown has been priced in by the market.
• "Supply will be reduced from the Philippines anyway when the monsoon comes in October - no matter what the result from their government" - third trader in Asia.
• Another hot topic is the halt of operations at Norilsk Nickel's Polar plant where it produced the SHFE-deliverable Norilsk Combine H-1 brand. The Chinese have shown less interest in it amid talk the SHFE might delist it.
• Elsewhere, briquette premiums were still weak at $5-10 in-warehouse on ample availability across Singapore and Malaysia.
• In Europe, premiums for full-plate nickel warrants in Rotterdam held at $60-80 per tonne, with the market starting to wake up after the summer break.
• "We received more enquiries at the end of August as more companies came back to the market but most of them are small end-users so the volume is not huge and the impact is not big" trader in Europe.
  
  

TIN PREMIUMS HOLD STEADY, ALL EYES ON RBT RETURN

• Tin premiums were stable this week - despite a patch of tightness in high-purity tin in Southeast Asia, demand for the metal remains sluggish overall during the summer lull and with LME three-month tin prices hitting $18,950 on Friday and recently trading at $18,670.
• "When tin prices surge to such high levels, people don't care much about premiums" - trader in Asia.
• Premiums for 99.9-percent-purity tin in Singapore warehouses remain at $50-80 per tonne, with the bulk of business done towards the lower end of the range - most deals are for the overhang of tin stocks from Refined Bangka Tin (RBT) in the region.
• "There is still much RBT material around… brokers sell them at $40-50"- trader in Europe.
• The main focus among market participants is RBT's return to production under new management some six months after Indonesia's largest independent tin smelter was shuttered due to internal factors, sources told FastMarkets.
• "Premiums-wise, there's no real change. The market has a wait-and-see attitude on how RBT will come back and how much [production] will come out from it" - the second trader.
• Premiums for three-nines in-warehouse Rotterdam was also steady at $350-400 due to a lack of buying interest but limited competitive offers below the level have also been heard.
• Premiums for 99.85-percent-purity tin were steady across all other locations.

(Editing by Mark Shaw)