Base metals looking for new direction from August macro data

After rallying through June and July, base metals have taken a breather at the start of August.  At present, most metals appear to be taking cues from movements in exchange stocks, in the absence of fresh direction from bigger picture indicators.

These are likely to be more positive on the China front, although mixed from ex-China given the diverging fortunes of the US and Europe/Japan.

Aluminium has taken over from zinc as the best performer in the last couple of months, as the fall in LME zinc stocks through this year has reversed a little.  So far it looks like most of the zinc inflows have ended up in  New Orleans.

While LME aluminium prices are back to levels not seen since the start of 2009, the contango in the cash-3m part of the curve has collapsed to much lower levels than seen then, of around 0-0.5%.

This probably is due to the fact that premiums are much, much higher than there were back in early 2013, adding ~$400/t to the all in cost of receiving supply.

Without this contango, the incentives for financing are hugely diminished, meaning more will want to escape financing deals once they roll-over.

This may not equate to a steep increase in readily available supply to the market instantly, as some metal is tied up in queues at large warehouses.  But off LME inventory tied up in these deals will be looking for a new home given the current forward curve. It's also worth keeping in mind that short term US interest rates are more likely to rise in the next 12 months than they have been at any time in the last 4 years.

Copper has been particularly directionless in the last month or so despite the market signs being mostly good news.  Near term Chinese economic momentum has looked a lot better, with the export engine now starting to fire a little better. Exchange stocks have ticked a little higher in the last few weeks, but are still at low levels.

Shanghai premiums have been a little lower but reasonably steady at ~$100/t, while Chinese imports of cathode have been fairly decent in the context of diminishing ex-China inventories.

Inventory in bonded warehouses in China are also coming down.  Some of this may be due to escaping from fraudulent deals now being investigated by the Chinese government, but this hasn't led to material flooding back into LME or SHFE warehouses at an alarming pace.

Some of the muted interest may just be seasonal given the reduced manufacturing output in the summer.  Stronger supply in the coming months is also a concern, with Grasberg coming back and rising TC/RCs suggesting ample concentrate availability.

The backwardation in copper prices has narrowed a lot as prices have rallied, although 3 month prices are still a little lower than cash.

Perhaps other base metals will hold together better than copper if the Chinese macro data prove to show improvement in the next few months, which seems likely.  But I don't think it makes sense to short copper in an environment of low exchange stocks and improving Chinese macro momentum.