Baseline view – Precious metals:
Gold remains underpinned by the geopolitical tensions in Eastern Europe coupled with the longer-term fears surrounding the dollar and high inflation globally.
In terms of the noble metals, we expect price pressures to remain embedded for now as supplies out of Russia dwindle. We expect the substitution of palladium with platinum becoming a factor in the coming months which will undoubtedly be favourable for South Africa.
Baseline view – Industrial metals:
Low inventory levels, the war in the Ukraine, and the sanctions against Russia are underpinning base metal prices while COVID-19 lockdowns in China are providing the cap. Distortions are appearing in different metals as the supply constraints become more apparent, last month it was nickel, this month zinc has experienced a surge. We do not expect volatility in the base metal basket to temper until we have a standdown in the Ukraine, even then it will take months for the supply chain to adjust and the likelihood of sanctions being reversed against Russia on a wholesale basis will be remote.
Gold has dipped below the $1900.00/oz mark just once since our last report. The yellow metal has received strong support from those investors looking for a geopolitical hedge as the Ukrainian conflict shows no signs of tempering any time soon. If anything the risks have risen significantly with Moscow misjudging the resolve of the Ukrainian people.
There is talk of Moscow turning to weapons of mass destruction, while reports of human rights violations fill the news wires. Equally, the dollar’s status as the world’s reserve currency has been shaken with Russia demanding that its energy contracts be settled in roubles, thus destabilising the “petrodollar” payment mechanism.
This will undoubtedly accelerate the diversification strategy many central banks have adopted increasing CNY, JPY, EUR and gold holdings. Given this backdrop it is difficult to call for a short position on gold.
Longer term investors with a buy and hold strategy remain committed to buying on any dips as seen on the 29th March when gold dipped below the $1900.00/oz mark. To the topside $2000.00/oz remains the first hurdle before the door to year to date high of $2070.44/oz is opened.
There has been a significant shift over the past couple of weeks regarding whether or not the world is comfortable processing or receiving Russian palladium. The London Platinum & Palladium Market suspended Prioksky Plant and Krastsvetmet of Non-Ferrous Metals from its goods delivery and sponge accreditation lists, while NYMEX followed suit shortly thereafter, understandably the market responded with additional concerns over supplies.
Fears over supplies has resulted in the auto industry seeking alternative sources. Anglo American Platinum has confirmed that it has received enquiries from manufacturers and carmakers. CEO Natascha Viljoen told Reuters – Palladium users with no existing contracts with the company have contacted Amplats about “potential alternative sources of palladium”.
Palladium remains below $2500.00/oz handle with all eyes on the prior high at $2550.80/oz, while platinum could find $1050.00/oz toppish for now.
Base metals have experienced a number of opposing forces over the past couple of weeks:
1. The issue of supply, whether as a result of sanctions on Russia or lower production from various parts of the world.
2. The threat of demand destruction as China locked down various parts of its economy in response to COVID-19 spreading rapidly through the world’s largest consumer of base metals.
3. Inflation and tighter monetary policy in the world’s largest economy namely the United States.
Sanctions and supply chain disruptions:
The vast majority of the world is collectively shunning base metals originating from Russia with many corporates actively taking part in the removal of Russian supplies from their raw material providers. News out at the start of April was that the London Metals Exchange suspended the placement of Russian branded base metals in its UK warehouses given the UK government’s decision to place an additional 35% duty on Russian base metal imports.
One other factor that has not been cited as a specific reason for the ban but may have contributed to the decision, is the fear of Russian base metals piling up in UK warehouses as corporates shun Russian produce.
COVID-19 and the Chinese growth conundrum:
Beijing remains steadfast in its quest to rid China of COVID-19 with its no COVID policy. Many would view this as an exercise in futility but this has not deterred the central planning monster. Gavekal Dragonomics found in a study conducted on the 7th April that 87 of China’s largest 100 cities by GDP
have imposed some form of restrictions.
This is causing a serious threat to the supply chain with some warning of complete supply chain paralysis. German auto maker Bosch has suspended output at its sites in Changchun and Shanghai, while at least 3 Taiwanese companies have suspended production until the latter portion of April given the supply gridlock.
While nothing is coming out of China, equally nothing can get in, this will impact raw material suppliers and threaten the recovery of the global economy.
Inflation and the United States Fed:
CPI data out of the US showed headline inflation accelerated by more than expected to a new 1981-high of 8.5% y/y in March, yet markets reacted as if this were a weak print with US Treasury yields dropping sharply post the release While initially surprising, this reaction makes sense in hindsight given
just how aggressively the market raised its expectations for extreme Fed monetary tightening in recent weeks and how inflation excluding energy and food actually moderated. Furthermore, the market may now be pricing in the latest print as the peak in inflation. Often, when a market is so fully priced in one direction, concern over a potential correction will drive investors to look for a reason to justify it. In this case, signs that core goods inflation in the US potentially peaked were that reason.
That being said, US inflation will not reach the Fed’s 2% target anytime soon, with a rate closer to 6% expected by year-end. Chairman Powell and Co. will thus still feel inclined to hike interest rates aggressively in the coming months, while balance-sheet reduction will be faster than in the past.
In the next section we unpack the metals which are the most prominent of the month.
Zinc is the outperformer with investors repricing the metal given the supply constraints. Top producer China’s refined zinc output fell sharply on both a monthly and annual basis in March given the COVID-19 disruptions while in the EU higher prices are keeping production lines at lower levels. LME inventories for Zinc are at their lowest levels since June 2020 at 117850 tonnes resulting in the premium for cash zinc over the 3m forward to rise to $64.00/tonne.
Our view: There has been a steady climb higher for the metal since the March reset following the Russian invasion of the Ukraine. Currently the metal is holding north of $4500.00/tonne and there is an expectation that we could reach the highs of $4896.00/tonne seen on the 8th March 2022.
China has shipped out its largest quarterly volume of aluminium as producers took advantage of tight western markets who have seen supplies dwindle sharply on the back of Russian sanctions and higher energy costs. This resulted in world prices trading at a large premium to domestic Chinese levels, something commodity traders could not ignore. Traders captured significant profits over the past quarter as they sold metal in bonded warehouses that could be exported tax free into a captive audience. Bloomberg data showed that the Chinese exported some 1.63mn tonnes for the first quarter of 2022, which was more than 25% higher than the same quarter last year.
Our view: To the downside we expect buyers to find value around the $3000.00/tonne mark, to the topside anything above $3500.00/tonne looks stretched.
Moving over to copper, we saw the global bellwether for economic health taking a backseat for the most part over the past month. The 3m LME contract has pivoted around the $10300.00/tonne mark for much of March and all of April thus far. Threats to supply from the likes of Peru are being offset against lower growth expectations out of China, while investors are still unpacking what higher inflation out of the United States does to the metal in the short term.
Our view: The benchmark 3m LME contract with pivot around the $10000/tonne handle for now.