Announced disruption to annualized commodity supply
When will tailwinds from supply disruption become headwinds from restarts?
Base metals prices have bounced 5-12% vs recent lows driven by: (1) improved risk appetite (2) significant supply disruption. Disruptions will persist for some time and a major price supportive disruption (e.g. mining shutdowns in Chile copper or Australia/Brazil Iron ore) cannot be ruled out; but in the coming weeks in our view tailwinds from newsflow on disruptions are likely to become headwinds from announced restarts. This week saw a balance between more disruption/lockdown extensions vs easing of restrictions: (1) FCX suspended the Chino copper mine in USA due to an outbreak of COVID-19; 2020 production was expected to be ~135kt. (2)Lockdown in India was extended by ~3 weeks (April-14 -> May-3); India accounts for 6% of global mine zinc production and is a significant met coal importer (~15%). (3) A number of South African miners were given approval for limited mining & processing from 14-April despite the lockdown being extended by 14 days. (4) Miners in Quebec (Canada) were classified as essential serviced and permitted to restart (Gold & Zinc).
China inventory draw encouraging
In our view monitoring the rate of visible inventory build will give an indication of the balance between demand contraction vs supply disruption. Last week's increase in visible inventory was reversed this week with London Metal Exchange (LME) inventories stable week over week but China inventories continue to decline as activity levels pick-up following the easing of restrictions. Of note aluminium inventory fell for the second week in a row declining by 4% (140kt) week over week. In our view the limited build in global inventories is encouraging and inventories remain low vs 2014-17 levels. But we continue to see a risk of further (potentially significant) gains in LME inventory in the coming weeks and concerns over weakness in export demand in China may limit the base metal inventory drawdown.
Positioning for a recovery but stay patient near-term
Supply disruption will act as an important offset to demand weakness, limiting commodity price downside (i.e. not as bad as 2008/9); but in our view the full impact is yet to be fully felt in physical markets and near-term increases in inventory/ restarts may put near-term pressure on base metal prices.