China perpetuates oversupply of aluminum, zinc

A number of the base metals are in oversupply right now, which is keeping prices depressed. BMO Capital Markets analyst Jessica Fung places some of the blame on Chinese reserve buying.

She noted that China’s State Reserve’s Bureau has issued tenders to buy 300,000 tonnes of primary aluminum and 50,000 tonnes of primary zinc from domestic smelters. The bureau’s goal is to support metal prices for domestic smelters in the near term, but she wrote that it just perpetuates the “fundamental issue of oversupply” of these two metals.
Aluminum prices are stuck at US87¢ a pound, down from highs of above US$1.00 last year. Inventories remain at all-time high relative levels, Ms. Fung wrote, with the “eventual unwinding of massive carry trades limiting price upside for years to come.” She noted that UC Rusal’s plan to cut 300,000 tonnes of production capacity is a positive, but it won’t be enough to get the market out of surplus. She figures that more than 30% of global smelters are still losing money.

Zinc is stuck at US89¢ a pound, and its price chart looks pretty similar to aluminum over the last couple of years. Ms. Fung wrote that although some larger zinc mines are closing in the next three to five years, that should be offset by new mine supply.

“BMO Research reiterates a cautious approach to mining equities with significant exposure to aluminum or zinc due to unfavourable market fundamentals relative to commodities such as iron ore or copper,” she wrote.

Source:http://business.financialpost.com

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