OREANDA-NEWS. September 09, 2015. In August, the base metals market remained focused on the situation in China with metal prices continuing to struggle on the back of further volatility across Asian equity markets. The Shanghai Composite Index was down 12.5% over the month registering its third consecutive month of declines.

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Asian stock market volatility saw investors focus on China’s slowing growth and concern intensified at the end of August, with the country’s official manufacturing PMI dropping below the 50 mark and into contraction territory with a reading of 49.7 for the month. This was China’s lowest official manufacturing PMI reading in three years.

Likewise, China’s devaluation of the Yuan in August was largely taken as a sign that the country was trying to strengthen its export market amid cooling growth, and the overall weaker outlook was confirmed at the end of the month when the People’s Bank of China announced a cut to interest rates by 25 basis points to 4.6% and the lowering of its reserve requirement ratio by 50 basis points to 18%.

As a result of these factors, metals continued to hit fresh multi-year lows, with the market perhaps more sensitive in thin trading conditions owing to the summer vacation period in the US and Europe.

Three-months copper hit a fresh six-year low, trading below the important \\$5,000/mt psychological level on LMEselect at \\$4,855/mt. Additionally, three-months nickel fell below \\$10,000/mt and traded as low as \\$9,215/mt on the exchange’s electronic trading platform.

Calls for supply discipline

Metals have now been on a downward trajectory since early May and the continued weaker outlook has seen many market participants call for supply discipline. In August, producers were largely reluctant to respond with any significant cutbacks ex-China, with some analysts suggesting there were concerns that there could be increased exports from China given the country’s weakening demand outlook. There is also something of a stand-off taking place, with producers holding out in the hope that market conditions will improve into 2016.

However, in August there were a number of announcements, most notable perhaps that Freeport-McMoRan is looking to cut copper sales volumes in 2016 and 2017 as prices cut deeper into the cost curve. Likewise, there was news out of China that the country is expected to shut around 2.4 million mt/year of aluminum smelting capacity before the end of 2015. Yet this was taken to be largely insignificant when China has continued to increase aluminum production this year and is expected add a further 3.2 million mt/year of new aluminum smelting capacity, according to metal research consultancy Antaike. Also on aluminum, Century said it would curtail its Hawesville smelter in Kentucky in October, removing 255,000 mt of production.

How long producers can continue at current price levels remains to be seen, and it now appears increasingly likely that cutbacks will be necessary to boost prices over the longer term.

Global manufacturing weaker

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August PMI manufacturing data from key regions was less supportive for base metals than it had been in July, indicating a weaker outlook for the global manufacturing sector. As noted, China’s official manufacturing PMI came in lower at 49.7 from 50 in July, while the Caixin Markit manufacturing PMI edged lower to 47.3 down from 47.8 in July. Markit said Chinese manufacturers saw the quickest deterioration in operating conditions for over six years in August and added that lower production requirements had prompted companies to reduce their purchasing activity at the fastest rate since March 2009. It is also noteworthy that the Caixin manufacturing PMI has now registered a reading below the 50 level for the past six months.

The eurozone PMI was also down slightly at 52.3 in August from 52.4 in July (growth in Germany, Italy, Spain, the Netherlands, Austria and Ireland offset the ongoing contractions in France and Greece.) Meanwhile, the US manufacturing ISM in August was down at 51.1 from 52.7 in July. This was its lowest reading since May 2013.

As a result of the lower PMI readings our weighted global manufacturing PMI of these key regions ticked slightly lower to 50.4 in August from 50.8 in July.

LME position data

LME position data released for August 28 remained predominantly bearish for base metals. Copper has started to look mildly better with net length increasing to 2,156 lots from 1,174 lots August 21 with the net short position established in July now disappeared. According to the position data, the short position dropped 18,961 lots and the long position dropped 17,979 lots. As we noted last month, the longs and shorts were broadly balanced and this might indicate the copper price was near the bottom as it traded around the \\$5,000/mt level. It remains to be seen whether the copper price will now see any significant follow-through buying.

Elsewhere, metals remained under pressure with position data mostly bearish. Net length for aluminum fell 13,364 lots to 39, 020 lots on August 28, compared to 52,384 lots August 21. Similarly, nickel saw net length down 2,440 lots to 7,727 lots August 28, compared to 10,167 lots August 21.

LME inventories

LME copper warehouse inventories continued to climb in August, reaching 367,650 mt, up a considerable 108% this year from 177,025 mt at the beginning of January. Nickel stocks remained broadly flat over the month at 453,894 mt at the end of August, but this was still up 9% from 414,900 mt at the beginning of January. LME aluminum inventories continued to slide and were down 22% at 3,265,750 mt in August from 4,205,225 mt in January.

LME aluminum warehouse inventories have continued to decline as waiting times at key warehouse locations have fallen. The waiting time for primary aluminum at Vlissingen in the Netherlands at the end of July was 327 days, down 9% month on month from 358 days at the end of June, and down 56% from 743 days at the end of July 2014. The waiting time at Metro’s Detroit warehouse in the US at the end of July was 328 days, down 8% month on month from 358 days at the end of June, and down 50% year on year from 651 days at the end of July 2014.

All eyes on China and the Fed

Overall, August was particularly bearish for base metals, with China’s slowing growth and volatile equity markets all having an impact on investor sentiment. For now, the market remains firmly fixed on China and the county’s metal demand outlook with calls for global supply restraint also becoming increasingly louder. Added to these factors is whether or not the US Federal Reserve Board will go ahead and cut rates as anticipated in September or wait until a later date, potentially December.

With these themes continuing to cause significant headwinds for metals, it seems likely that the market will remain under pressure in the near term with relief rallies continuing to meet resistance due to the lack of any significant follow-through buying.