China’s State Reserve has decided to sell reserves of aluminium, copper, and zinc to control the high prices and promote orderly development of upstream and downstream enterprises, said Hou Yahui, an analyst at Shenwan Futures.
Following the sharp price rise of many products in the non-ferrous metal sector in China, the National Standing Committee and the National Development and Reform Commission had voiced their concerns and demanded price trends of bulk commodities to be closely monitored.
Yahui said unlike the previous dumping of reserves, the specific varieties of copper, aluminium and zinc is distributed to selected downstream terminal enterprises. This practice will resolve the current tight spot as companies can restock from both the State Reserve Bureau and spot traders at the same time. This will lead to a drop in spot premium and the destocking of inventories will reduce. Local media reports mentioned that there is no official document ascertaining the same.
Gu Fengda, head of the research and consulting department of Guosen Futures, said that except for copper, dumping of reserves will have a short-term impact on prices, premiums, and discounts. The price for non-ferrous oscillation adjustment has increased and the same will have a limited impact on copper prices.
In China, dumping of the reserve was last done in 2010. The sharp rise in prices of non-ferrous metals eroded the profits of downstream processing companies. The dumping of reserves will restore processing fees of downstream companies added, Hu Pan, a researcher at Haitong Futures Nonferrous Metals.
Pan added the market is waiting for Federal Reserve in US to relax its monetary policy. If the economic indicators of countries in Europe and the US improve, the unemployment rate can reach the expected level, Fed may discuss the scale of debt purchases and the same will have an impact on the non-ferrous metal sector.
In addition to this, the Chinese domestic supply of refined copper has dropped slightly. Following the centralized maintenance of smelters and the increase in exports, downstream copper consumption is still supported. Therefore, it is expected that the dumping of reserves in China will strengthen the downward trend of copper prices. As the peak consumption season gradually passes, copper prices will face greater downward pressure.
The dumping of copper reserves will slow down the depletion of domestic explicit inventories, weaken spot premiums and discounts and put restrain the inflow of imported copper, added Zhang Weixin, a copper researcher at CITIC Construction Investment Futures. Weixin added that the current import loss is still at around CNY700/mt.
On the impact of dumping of reserves on aluminium prices, Wang Xianwei, an aluminium analyst at CITIC Construction Investment Futures, said that in the short term, prices may be under pressure. After market sentiment stabilizes, price logic will return to fundamentals.
He added that load reduction measures for electrolytic aluminium enterprises in Yunnan will be over by June-end. Currently, due to production cuts in Yunnan, Guizhou, and Inner Mongolia, Gogyi and Southwest and South China are all experiencing tight spot stocks.
Local media quoted Xianwei stating that even if the stock dumping is confirmed in the later stage, it will take time from the auction to the market flow and the short supply situation is difficult to change.
Yahui said according to the current market news, the estimated dumping reserves of aluminium ingots may be around 300,000mt, with an average of around 50,000mt per month. Considering that there is still a gap in China’s imports, the number of dumped reserves may supplement this gap. He added that since the disturbance to the balance of supply and demand of aluminium throughout the year is not too large, and the subsequent downward adjustment of aluminium prices is expected to be limited.
Local media reported that the tight supply of zinc concentrate has improved slightly, the TC processing fee has rebounded slightly. The peak-shifting power restriction measures in Yunnan will reduce. Consumption is currently weakening, and orders for both the galvanized sheet and the die-casting sheet have declined compared with May, at the same time, the social inventories have declined it is expected the inventories may increase in late June.
Xianwei said that the dumping of stock will slow down the pace of destocking and zinc prices will face downward pressure.