For the suite of industrial metals traded on the London Metal Exchange (LME) the new year has started off where the last one left off. Copper hit a fresh six-year low of $4,381 per tonne on Monday morning. Last week it was zinc, with a low print of $1,470.50 per tonne. The consensus is for more of the same, a relentless downwards grind, with one eye on gyrating Chinese stock markets and the other on a sinking oil price.
China, of course, is why most of the LME metals are sliding back towards financial crisis levels. The historical reference point is telling. The demand shock caused by the loss of growth impetus in the world's largest buyer of all things metallic is analogous to the contraction in global manufacturing that followed the financial meltdown of late 2008.
The focus on the oil price is also logical, given energy is a key cost input for all base metals production. With no sign of any demand driver to replace the loss of China, the focus is on supply and each metal's cost curve, a moving target which, thanks to falling oil prices, is also falling right now.
Not that supply cuts, whether voluntary or involuntary, will generate a major turnaround in fortunes. But they can act as powerful brakes within the general slide. Supply dynamics fed price differentiation last year. While all the LME metals ended 2015 lower than they started, the gap between lead, which fell by only four percent, and nickel, which slumped by 40 percent, was huge. And supply dynamics will continue to determine relative performance this year as well.
Because China's hard landing has caught each metal at a different point of the supply spectrum, a natural fundamental landscape that can be reshaped by producer cutbacks or the lack of them. At one end of the supply spectrum lies zinc. It is ironic that after waiting years for the long-heralded mine supply crunch to arrive, zinc bulls are now starting to see it materialise at a time when demand woes are pummeling the price.
Australia's giant Century mine, which came to epitomise aging mines' prolonged death throes, has finally hauled its last ore. So too has the Lisheen mine in Ireland. Accentuating the hits to supply from these closures has been Glencore's decision to mothball around 500,000 tonnes per year of mining capacity, most of it in Australia and Peru, and Nyrstar's suspension of its 50,000-tonne per year Middle Tennessee mines.
The combined effect has been to tighten the raw materials part of the supply chain to the point that smelter treatment charges, the best indicator of the availability of concentrates, have started to fall sharply. That in turn has generated a reaction further down the supply chain, with a grouping of Chinese smelters planning to cut refined metal output this year by 500,000 tonnes in the face of weakening conversion fees and weak outright prices.
Bullish may not be the word for it, given the overall state of the metal markets, but zinc's supply picture is possibly the least negative of the LME pack. Copper's supply dynamics are more complex than those of zinc, with unforeseen production hits and producer cutbacks balanced against new mines and expansions of existing mines.
Take, for example, Canadian producer Imperial Metals, which last week announced it is mothballing its Huckleberry mine in British Colombia due to low prices. The resulting 20,000-tonne per year hit on supply, however, has to be seen in the context of Imperial focusing its resources on ramping up the new, bigger Red Chris mine in the same state. That said, there are signs that the supply hits are starting to outweigh the supply additions.
As with zinc the hardest evidence comes in the form of concentrate treatment and refining terms. The first major concentrates supply deal for 2016 shipments was signed between Chilean miner Antofagasta and Chinese smelter Jiangxi Copper. The headline terms of $97.35 per tonne and 9.735 cents per lb marked a significant decline from 2015's $107 and 10.7 cents, attesting to lower than expected raw materials supply availability.
For an explanation look no further than the supply growth downgrades coming out from research houses such as Wood Mackenzie. At the start of 2015 it was forecasting mine supply growth of 6.4 percent in 2016. By the close of last year that figure had been slashed to 1.4 percent.
And as with zinc, changes in the raw materials dynamic are starting to run down the supply chain: witness the plan by Chinese smelters to cut refined metal output by at least 350,000 tonnes this year. At the other end of the supply spectrum sit metals such as nickel and aluminium. Nickel got punished last year to the point that the current LME price of $8,335 per tonne is already lower than the troughs seen in 2008-2009.
It's not hard to see why. Not only is this market sitting on huge stocks of metal, but there has been virtually no supply reaction to such historically depressed prices. Indeed, a new generation of mines, including the likes of Ambatovy in Madagascar and Ramu in Papua New Guinea, is still ramping up to full production. All eyes and all bullish hopes rest on China's nickel pig iron (NPI) sector, which faces the dual challenge of low prices and reduced ore supply resulting from Indonesia's ban on exports of unprocessed minerals at the start of 2014.
There have been NPI closures but the expected wholesale collapse of the sector has not happened. With everyone else hanging on in there expecting that it will, the net result is a market still generating surplus units. Lacking producer cutbacks, any rebalancing of nickel supply is going to be a Darwinian battle for balance-sheet survival, both in China and everywhere else. The same might be said of aluminium, another metal burdened by legacy stocks and continued over-production.
Alcoa announced last week it will close another US smelter, leaving Aluminum Company of America with only one operating plant in America and even that, Massena West, only thanks to an eleventh-hour rescue package from the state of New York. The loss of another 270,000 tonnes of aluminium from the closure of the Warrick smelter, however, has done nothing to help the price. That's because global production was still growing at a robust 6.3 percent in November last year thanks to 10-percent growth in China.
Not that Chinese smelters aren't feeling the same financial pain as their Western peers. Just that those hurting most are being helped by local governments and by Beijing, the latter in the form of "strategic" buying of unsold stock by the government stockpile manager, the State Reserves Bureau.
The government seems to be tying the stocks purchases to commitments to idle capacity but the reality is that what the global aluminium market needs is lots of Chinese capacity to close permanently. And that still looks a remote prospect. Lead and tin sit somewhere in the middle of the supply spectrum, perhaps because in each market supply is an accumulation of known unknowns. In the case of lead this is down to the importance of scrap in the supply chain. It accounts for a much higher percentage of overall supply than in any other metal, which translates into a much higher degree of opacity.