Metals prices plummet, awaiting the China safety net  Macquarie Research,

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Metals prices plummet, awaiting the
China safety net
 Financial market pressures have finally reached the metals sector, with a
rapid downturn in prices evident. The vicious circle of worries regarding
slowing developed world demand certainly provides further near-term
downside risk to prices. However, with inventories low, such a situation would
provide yet another very timely buying opportunity for Chinese participants,
such that any price collapse is likely to be short lived.
Latest news
 Base metals finally capitulated on Friday, with vast sell-offs across the board.
Zinc was the worst at -5.6%, but none sidestepped the crash. Even gold, the
traditional safe-haven, fell 1.2% on the day amid general liquidation.
 Over the week as a whole the picture is even worse, with nickel, tin, zinc and
palladium recording double-digit falls. Only gold rose, up 1.9%. Meanwhile,
commodities where the Chinese physical market sets the price (ferrochrome,
iron ore) edged slightly higher on the week.
 MMG, the Hong Kong-listed subsidiary of China's Minmetals, reported a 4%
QoQ rise but 13% YoY fall in production of zinc concentrates to ~156,500t in
Q2 2011. For 1H 2011 as a whole, output was 3% lower than in the first six
months of last year at ~307,600t, due to declining ore grades and mill
scheduling issues at the company's Golden Grove zinc-copper mine. This is
less than our expectation of flat output year-on-year and significant in the
market for zinc concentrates where tightness is emerging and reflected, for
example, in low spot treatment charges. MMG operates three zinc mines in
Australia and is the world's third largest producer of zinc concentrates after
Xstrata and Vedanta, with a world market share of ~5%.
 The two-week strike at Chile's Escondida copper mine may be nearing an end
after the majority of union workers voted to accept a new offer from BHP
Billiton, which owns the controlling stake in the mine. Workers had originally
wanted a bonus payment of 5m pesos (~$11,000) for FY2010-11 but have
reportedly been offered 2.65m pesos. We estimate that output of ~35,000t
copper contained could have been lost as a result of the strike action to date
and, although workers appear to have settled for only around half of their
original demand and less than Escondida's initial offer of 2.8m pesos, there is
a clear risk that the concession to workers outside of prescribed pay
bargaining periods sets a precedent potentially for further wage cost
inflation and potentially more fractious industrial relations in future.
 Preliminary data on Chinese coal imports for July were substantial at 17mt,
according to the China Coal Times, up from 13.7mt in June. Most of the delta
was in thermal coal, with both bituminous and sub-bituminous imports rising
strongly from June. Coking coal imports were also reportedly higher at
4.2mt, although it seems likely that this was largely due to a rise in imports
from Mongolia. Total coal imports YTD are currently down 6.7%YoY.
 Coal prices were incredibly steady through the week despite moves in
broader markets and oil pricing. Physical markets were a bit more active this
week, with API#2 holding very steady ~$126/t, while Newcastle saw two deals
at $118.50/t.