As we approach mid-2009, the global economic outlook has shifted from one of pessimism and fear of the unknown to optimism and a feeling that the worst of the financial crisis and global recession may be behind us.
External influences on the base metals are somewhat supportive, with equities trading positively in the European session, and Asian equities putting together a robust performance. Crude oil is also stronger, and seems to have established a foothold above the $60 per barrel level.
The USD is mixed, weaker against the EUR and the JPY but unchanged to lower against the commodity currencies. In the US, existing home sales increased by 2.9% month-on-month in April, according to the National Association of Realtors, although they remained down by 3.5% year-on-year.
The premise for the recovery in base metals prices has been based on very little evidence, however. The fact that Chinese imports of refined metal have exceeded expectations is not based on any real pick-up in consumption, but more on the shifting of surplus metal from one location to another. The main forces behind this have been Chinese consumer and State Reserves Bureau restocking, and the strong arbitrage trade in copper, zinc and aluminium.
In fact, the SRB might have been far more active in the copper market than currently thought, and China plc is stocking up on raw materials in order to drive its huge infrastructure-focused economic stimulus programme.
The economic outlook in the West may be less blitzed-out than it was in December, but the West has not yet turned a corner, only glimpsed the possibility of a corner that might be able to get round. Therefore, the evidence from steel and the minor metals’ prices suggests where we really are today, without any solid indication that industrial activity (and therefore demand) has started recovering.
Speculative investment has accounted for the relatively better price performance of base metals so far this year, with investors betting that the bottom of the cycle has been reached and that as a consequence, base metals’ prices have bottomed.
The price rally is largely based on Chinese imports and a swing of the pendulum away from deep pessimism to optimism. This may not be illogical, but there still exists significant structural overcapacity in most markets, and price rallies may soon be capped by supply reactivations. However, the sharp destocking in the rest of the world should end in the second half, and recent readings from steel and other sectors in the US indicate that the destocking there is almost over.
Those expecting a big hole in world demand as Chinese imports ease may be surprised by the extent to which a recovery outside China may gather pace.

In London, the Lead cash settlement price rose by 15% to US$1,530.00 per tonne while the Zinc cash settlement price rose by 4% to US$ 1,509 per tonne on May 29, 2009. Chinese zinc and lead apparent demand continued to boom in April, rising by 34.5% and 41.2% year-on-year, respectively due to a massive increase in net imports.
Refined zinc net imports soared up to 106,276 tonnes in April, up 677% year-on-year, according to Chinese customs. However, the 40-50% rally in zinc prices over the past two months has resulted in 500,000 tonnes of Chinese zinc mine supply being brought back into production.
Demand-wise, traders are re-exporting refined zinc to LME warehouses as China is now oversupplied. This has been reflected in the sharp decline of physical zinc premiums into China since mid April. Thus the Chinese refined zinc imports are unlikely to be sustained into 3Q09 (given the positive SHFE/LME import arbitrage has narrowed substantially over the past month).
In Peru, Doe Run’s La Oroya smelter was restarted after being halted in March with zinc and lead output respectively at 30% and 50% capacity. Volcan has confirmed the open-pit mining suspension at its Cerro de Pasco operation.
In Chile, Breakwater has curtailed operations at El Toqui by 50%, while in Canada, it opted not to place Myra Falls on care and maintenance. In Australia, mine mill throughput happened to be higher than the planned reduced rate in January-March, 14% higher at Perilya’s Broken Hill and 44% higher at Endeavor mine.
LME Lead stocks rose to 78,975 tonnes while zinc stocks dropped to 326,600 tonnes.

In London, the Copper settlement price rose to US$ 4,776 a tonne with a contango of US$ 11 on May 29, 2009. Another month and another record topples. Chinese imports of unwrought copper hit a record 399,833 tonnes in April, up 6.6% from a month earlier. It is the third successive monthly record, while refined imports have increased year-on-year in each month since September.
As a result, the copper price is up more than 55% from the start of 2009. Meanwhile, LME warehouse stocks have declined by 34% since the beginning of March. Stocks drawdowns started in Asian and then European warehouses, with warehouses in Korea and Singapore now cleaned out. However, much of these huge imports are due to the Chinese consumer and the SRB restocking, besides the arbitrage trade between the higher Shanghai price over the LME price and to semi fabricators augmenting their working stocks with refined metal because of lower copper scrap volumes.
Clearly, China is absorbing the acute surplus of metal while prices are still low, as any meaningful recovery in the West would obviously exert upside risk. Therefore, much of the metal bought into China was probably acquired some time ago, when the copper price was lower than at present, and the metal is only now making its way to Chinese ports. This may cap the copper price in the medium-term, since Chinese demand will be satisfied by its own ‘in-house’ stocks.
In addition, unlike other base metals, copper producers have been reluctant to cut or close production. Clearly, with input costs declining and the copper price soaring, most copper miners can make a nice profit.
In Zambia, plans to close the Mopani Copper Mines unit have been halted, while the Bwana Mkubwe processing plan has been restarted by First Quantum.
In Myanmar, the Monywa mine, the country’s sole copper mine, has resumed production after a year's suspension of operations.
LME copper stocks dropped by 21% to 311,975 tonnes.

In London, the tin settlement price rose by over 12% to US$ 14,325 per tonne with a backwardation of US$ 250 on May 29, 2009, suggesting near-term tightness in the market.
In Japan, imports of refined tin in March were 62% down on the same month of 2008. The slump reflects the continuing difficulties faced by export-oriented Japanese electronics and automotive manufacturers, as well as de-stocking.
In China, tin imports rose by 44% year-on-year in January-March, reflecting the arbitrage opportunity. April production was reported at 12,472 tonnes, up 8.5% year-on-year. This is the first month this year that output has been higher than in 2008.
The pick up reflects improved demand and raw materials availability, although capacity utilisation at solder companies and other consumers is still estimated to be no more than 70-80%.
In Indonesia, the trade ministry estimated that the country’s refined tin exports fell 22.5% year-on-year in April, to 6,082 tonnes.
The drop over the last two months partly reflects a rush of shipments made in March ahead of the introduction of new rules requiring letters of credit for all tin export sales over US$1 million from the start of April.
Besides, independent smelters have reported continuing problems in obtaining sufficient supplies of tin ore. PT Bangka-Belitung Timah Sejahtera is now operating 30-40% below its capacity of 5,000-6,000 tonnes of refined tin per month.
However, PT Koba Tin is back on track to produce over 9,000 tonnes of refined tin this year, following a quick recovery from the flooding of two of its gravel pump units earlier this month. LME stocks rose to 14,480 tonnes.

In London, on May 29, 2009, the Gold AM fixing rose by 10% to US$ 972 per ounce, its highest since February 24 and spot Silver rose by 28% to US$15.52 per ounce, its highest since August 2008.
Much of the rally was down to a fluctuating dollar, with gold’s latest rally being courtesy of renewed fears about the outlook for the US currency given the ballooning budget deficit.
Silver really outperformed the yellow metal this month owing to a combination of firm gold prices and renewed optimism concerning a possible recovery in industrial activity.
However, a pick up in the equity markets has dampened fresh flows into physically-backed gold ETPs. Inflows are up 5 tonnes in May, compared with 53 tonnes during the first seven trading days in February when inflows for the month hit a staggering 220 tonne record high.
The main source of positive news was from China, announcing the addition of 454 tonnes to its gold reserves. China now holds 1,054 tonnes, up 75% since 2003. Such an announcement has long been awaited by the gold market, given China’s relatively small gold reserves in relation to its economic size, and while bullish was perhaps slightly disappointing, given some of the wilder expectations.
However, it reinforced hopes that the era of massive net central bank sales has come to an end. In Russia, the central bank data shows it purchased about 7 tonnes of gold in March, the 24th consecutive month it has increased its reserves.
In Mexico, Coeur d’Alene has reported its silver production rose 65% year-on-year to 3.9 million ounces driven by growth from the San Bartolome mine - the largest primary silver mine at 2.1 million ounces.

In London, Nickel rose by 19% to US$ 13,770 per tonne, with a Contango of $30, on May 29, 2009.
Cobalt min. 99.8% traded at US$ 14.50 per pound and Cobalt min. 99.3% at US$ 12.95 per pound on May 29, 2009.
No other base metal is in such a poor state fundamentally, besides perhaps aluminium, yet nickel has seen its price rise by as much as 40% since 1st April.
A central driver for this rally has come from optimism regarding the pace of recovery in the condition of the global economy.
In addition, reports of stainless steel mills in China raising operating rates, rising nickel product prices in the region and continued strength in Chinese refined imports have signalled an improvement in Chinese demand levels. Still in nickel’s favour is the volume of production that has been cut in 2009. More than 310,000 tonnes of mined nickel has been removed in 2009, while new supply that was previously scheduled to come online in 2009 will likely be delayed for the most part of it.
In Australia, BHP Billiton announced plans to close its Rocky’s Reward open-pit mine at Leinster Nickel Operation, due to low prices, while China Minmetals stated that it will not restart Oz Minerals’ Avebury nickel mine until the nickel price is at least 13,225 per tonne. In China, nickel production is to rise by 11% in 2009 according to Antaike’s analysts.
In Finland, Finnish producer Talvivaara said it is unlikely to meet its nickel output targets for 2009 because of lower crushing levels.
LME stocks dropped this month to 110,346 tonnes.