Metals stocks – looking through the headline numbers  ::Macquarie Research

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Metals stocks – looking through the
headline numbers
 The high and rising level of reported metal stocks, notably aluminium and
zinc, is commonly seen as a bearish reflection on fundamental market
conditions and reason to think that prices will surely fall under the weight of
this inventory. In our opinion, however, what ultimately matters most for
metals prices, and premiums, is not the absolute level of stocks but consumer
access to those stocks. Access has been limited by carry trades and the way
in which withdrawals from the LME warehousing system work, which has
seen some locations morph from the market of “last resort” that the exchange
is intended to be – in principle at least – to a market of first resort for
producers and a market of no resort for consumers. As a result, metals prices
and premiums have risen even as reported stocks have increased, and we
think that prices and premiums will continue to trade at higher levels than
would be suggested by traditional analysis of stock-to-price ratios.
Latest news
 Major LME base metals prices all rose in trading on Tuesday (19 July), with
zinc in the vanguard for a second day on an advance of 2.4%, despite
ongoing worries over major macro risks in the world economy (US and European
sovereign debt, Chinese inflation and so on). Aluminium also added over 2%
and copper closed up by 1.5%. PGM prices also rose, although gold at
$1,601/t.oz and silver were almost unchanged on the day.
 Iron ore prices continued their slow upward push, with the latest assessment by
Platts for 62% Fe CFR China rising $0.5/t to $176.5/t. This assessment has
remained consistently above $170/t since March, and we would reiterate our
view that current strength in rebar prices – both spot and futures – is fully
incentivising small Chinese steel mills to produce as margins remain robust.
With this scenario, the iron ore price outlook remains firm and with inventories
low, we expect a reacceleration of the prices towards the end of Q3.
 Latest data from the American Iron and Steel Institute show weekly crude
steel output in the USA last week hit its highest level since October 2008.
Annualised output came to 88.6mt, at a capacity utilisation level of 76.8%, with
the potential for stronger-than-anticipated auto output during the summer
months resulting in some restocking. Year to date, output has averaged
85.6mtpa, up 6.6% YoY. Meanwhile, Italian steel output rose 9.4% YoY to
14.7mt in the first half of 2011, according to data from Federacciai.
 Despite the grade decline affecting the Escondida mine through Q2 2011,
Chile’s May copper output rose 2.1% YoY to 443,000t according to Cochilco,
the country’s copper commission. Within this, Codelco saw its output fall by
8.2% YoY to 133,600t. This year to date, Chilean copper production totalled
2.14mt, down 0.7% YoY.
 The recent rebound in the nickel price has forced China’s largest stainless
steel producer, Shanxi Taigang, to raise August prices for austenitic grades.
304 2B 2mm cold rolled sheet is now priced at RMB24,100/t ($3,728/t), up by
2.1% MoM. This is a reversal of a four-month drop in prices through the April
to July period of RMB5,200/t.