The market continues to integrate the risk premium resulting from the growing disruptions of certain metal productions in the context of the current energy crisis from Europe to China. Meanwhile, worsening damage to supply chains has fueled inflation fears, which may have prompted macro investors to seek metals for an inflation hedge (see note). LME front spreads have tightened significantly as stocks such as copper and zinc continue to decline as fears of rising prices may lead buyers to pull stocks. Last Friday, Glencore announced cuts to its three operations in Europe, producing ingots and zinc alloys. As a result, 3M LME zinc hit its highest level at $ 3,944 / t, its highest level in 14 years. As for aluminum, stocks started to increase from the Chinese market in line with the seasonality pattern. According to Mysteel, this has increased by 31 kt since last Thursday to reach the latest total of 941 kt. Management is in line with its pattern of seasonality, but a faster pace can be seen as a sign of demand destruction.
In Asia, it is worth keeping a close watch on China’s current energy crisis and the growing risks that the coal supply potentially affects metal production in India. Despite authorities’ efforts to deal with the electricity crisis, including increasing coal production, thermal coal prices on China’s Zhengzhou Stock Exchange reached record highs last week. A slight reprieve is that local news reported that the production and transportation of charcoal has returned from Shanxi province after severe flooding complicated the situation. However, demand for coal and electricity is expected to increase as the cold snap started to hit parts of northern and eastern China over the weekend, implying increased demand for coal and household electricity as the winter heating season approaches. All of this could mean that instead of easing or lifting existing restrictions on the metal supply side, there could be an escalation of disruptions.
The latest CFTC data shows speculators increased their net long position in COMEX copper, buying 9,158 lots in the last week of reporting, and leaving them with a net long position of 35,564 lots last Tuesday. For precious metals, speculators increased their net long position in COMEX gold by 1,976 lots, leaving them a net long position of 69,817 lots.