Column: Metals markets brace for a different kind of slowdown

LONDON, Oct 27 (Reuters) – The specter of recession hangs over London Metal Exchange (LME) Week festivities this year.

The consensus of analysts is that the European manufacturing sector is already contracting and that the United States could well follow.

Demand forecasts have been revised downwards. The International Lead and Zinc Study Group (ILZSG) now expects global zinc use to contract by 1.9% this year. At its April meeting, it expected growth of 1.6%.

The International Nickel Study Group cut its global demand forecast from 8.6% in May to 4.2%, reflecting a drop in stainless steel production.

Large quantities of aluminum are already flowing into LME warehouses as the supply chain destocks.

The LME index (.LMEX), a basket of basic base metals, has gone from boom to bust in record time, plummeting 29% from its all-time highs in March.

But this slowdown comes with three unusual features that have combined to create a heady cocktail of uncertainty.

LME index and monthly variation


The status of Russian metal has been a key topic of discussion at many seminars and parties this week in London.

Should the LME suspend deliveries of Russian aluminium, copper and nickel or should it maintain its policy of not anticipating official sanctions?

The battle lines are drawn.

German copper producer Aurubis (NAFG.DE) has joined US aluminum producer Alcoa (AA.N) in publicly calling for an LME ban on the Russian metal. The Norwegian company Hydro (NHY.OL) wants government sanctions.

European aluminum consumer group FACE wants the European Commission to intervene to stop any bans, saying it would risk “destroying Europe’s independent downstream aluminum industry”.

The deadline for responses to the LME Discussion Paper is Friday.

There’s a lot of metal supply at play here. Rusal produces almost four million tons of aluminum every year.

Nornickel accounts for approximately 7% of the world’s nickel supply and, critically for the LME, is a major supplier of the Class I metal deliverable under the exchange contract.

Russia produced 920,000 tonnes of refined copper last year, about 3.5% of the world’s total, according to the US Geological Survey.

An LME ban on Russian metal deliveries would clearly have significant ramifications for both the LME and physical market prices. More government sanctions would have an even harsher impact.

Zinc and lead markets expected to remain in supply shortfall in 2023


The second quirk is that the price drop comes at a time when the supply of many metals is still very tight.

Europe has already lost over a million tonnes of aluminum smelting capacity due to high energy prices and is likely to lose more as electricity price hedges will expire.

The impact on the price of aluminum was cushioned by the simultaneous decline in spot demand and an aggressive ramp-up of production in China during the first half of the year.

However, China’s aluminum smelters are also facing constraints, particularly those in the drought-stricken hydroelectric province of Yunnan, an emerging hub of “green” metal production.

The smelter bottleneck is most acute in the case of zinc, reflecting both European power cuts and a range of problems at other smelters around the world. Canada’s CEZ has just joined the list, announcing that it will close by the end of the month for preventative cell maintenance. He does not yet know when he will be back.

The ILZSG predicts another year of supply shortfall for zinc and lead next year as smelter availability reduces the flow of mined concentrate.

The outlook is for continued high physical premiums, particularly in Europe and North America, and no replenishment of depleted stock stocks.

Copper is least affected by the energy crisis and there is broad analyst consensus around the International Copper Study Group (ICSG) forecast that the global refining market will go from a supply shortfall to a surplus of 155,000 tonnes next year.

However, the modest magnitude of this surplus is likely to limit supply and, like zinc and lead, will do nothing to replenish depleted visible stocks.

The conundrum of low prices and low inventories looks set to continue for some time and it will become more acute if the LME restricts the delivery of Russian metal.


While its sister organizations have lowered their demand forecasts for lead, nickel and zinc, the ICSG has actually raised its demand growth estimate for this year from 1.9% to 2.2. %.

Strong Chinese imports of refined copper this year have pushed the calculation of apparent ICSG usage to 2.5%. Imports are expected to accelerate further given the reduction in bonded warehouse stocks and the resulting very high import premium.

The country’s thirst for copper seems abnormal given the well-known problems in the real estate sector, a major component of China’s demand for copper.

However, it appears that copper use, at least in China, is now finding an additional driver in the form of public investment in green transition technologies.

The much-hyped green booster may finally be starting to arrive and it raises the interesting question of whether Doctor Copper will maintain its price relationship with the broader economic cycle or begin to move more in step with the decarbonization cycle.

This is already the case for nickel. Although the use in electric vehicle batteries is still small compared to that of the stainless steel sector, it is growing faster and playing an increasingly important role in the structure of the global market.

High energy prices that are disrupting both metal producers and consumers will accelerate the green transition as Europe seeks to reduce its dependence on Russian fossil fuels.

This means even more public funding for renewable generation capacity and for subsidies for electric vehicles, advancing both the timetable for the energy transition and the drawdown of the metals needed to achieve it.


The world will need a lot more metal to meet its carbon reduction goals. Unfortunately, current prices are too low to incentivize the necessary investment in new mining and smelting capacity.

This is a major conundrum that can be added to the confusing mix of bearish absolute prices, existing supply disruption, potential Russian supply disruption and, in several cases, extremely low FX stocks.

Confused? Do not worry. The same was true for almost everyone in London this week.

The opinions expressed here are those of the author, columnist for Reuters.

Editing by Kirsten Donovan

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and non-partisanship by principles of trust.

Andy Home

Thomson Reuters

Senior metals columnist who previously covered industrial metals markets for Metals Week and was EMEA Commodities Editor at Knight-Ridder (later Bridge). He started Metals Insider in 2003 and sold it to Thomson Reuters in 2008. He is the author of “Siberian Dreams” (2006) about the Russian Arctic.