By Alex Kimani
heavily thanks to a stronger USD as well as a looming taper in the Fed’s bond-buying program.
In a virtual speech to the Fed’s annual Jackson Hole symposium in Kansas City, Federal Reserve Chair Jerome Powell said the central bank could begin reducing its monthly bond purchases this year, though he did reassure the markets that the Fed will not be in a hurry to begin raising interest rates thereafter.
But that has not done enough to calm market jitters.
According to Standard Chartered strategists, the looming taper and strengthening U.S. dollar have been weighing heavily upon the precious metals complex alongside shifts in risk appetite. To wit, tactical and longer-term investors have largely been scaling back across the complex. The markets have become increasingly concerned around the Fed tapering timetable, the impact of the Delta variant on economic recovery, and fears around China’s demand slowing.
Nevertheless, Stanchart’s FX team believes the USD should start to weaken again as the pace of vaccination gathers momentum across Asia and as the risk of imminent Fed tapering of asset purchases has eased. This should be bullish for precious metals and commodities in general.
Market focus is now shifting to the FOMC meeting on 22 September, though a tapering announcement is seen as being unlikely until the November FOMC meeting. The September meeting is expected to introduce the staff forecasts, or ‘dots’ for 2024, with 2024 dots expected to mirror 2023’s two rate hikes.
Precious metals selloff
Platinum, palladium, and rhodium have all set intra-year lows amid large-scale disinvestment and as market balances continue to loosen.
Rhodium fell by more than 15% over the past week to trade at USD 12,250/oz at the time of writing (the August 2020 low) after trading close to USD 30,000/oz in March.
Palladium was down more than 14% and dipped below USD 2,000/oz—the July 2020 low—having tested levels above USD 3,000/oz in May.
Meanwhile, platinum prices were down just 6% to USD 980/oz while gold suffered least, falling less than 2%.
ETF interest and tactical interest in platinum and palladium fell in early September, down 38.6koz and 14.9koz, respectively.
Net short positioning in platinum has deepened thanks to a combination of long liquidation as well as new short positions, taking net fund length as a percentage of open interest to -10% while fresh short positions were largely to blame for a reduction in net positioning in palladium.
The scaling back of interest is evident in the recent price action, but also comes ahead of what is usually New York Platinum Week; a week of data releases that should either confirm or deny looser supply and demand fundamentals.
Stanchart has predicted that Platinum Group Metals, in light of pent-up auto demand and supply shortages, could see supply loosening further in Q3-2021 thanks to chip shortages impacting auto production as well as the return of supply from South Africa and Russia.
The platinum surplus during Q2-2021 was largely driven by the return of supply from South Africa, which more than doubled y/y and was up 13% q/q at 1,165koz, the highest since Q4-2019, pre-COVID. Supply from Zimbabwe also bounced back while auto-catalyst recycling rose by 42% y/y and 1% q/q. On the demand side, auto-catalyst demand, unsurprisingly, bounced back amid pent-up consumer demand, which buoyed sales (up 75% y/y but down 7% q/q). In contrast, ETF demand was down 75% q/q and 71% q/q to 31koz. The surplus was the largest on record since Q1-2020, during the initial onset of the pandemic.
Key questions during the industry week (to be held virtually on 20th – 21st September 2021) are likely to center on the following themes:
- Impact of chip shortages on auto production for 2021 and 2022
- Availability of stocks in light of supply shortages
- The resilience of ETF investors and the impact of the Delta variant on supply growth.
Longer-term themes are likely to revolve around substitution, the hydrogen economy, and switching balances. The London Bullion Market Association (LBMA) will also hold its annual conference virtually on the same dates.
Stanchart has predicted a rebound in prices for Platinum Group Metals as auto chip shortages ease and pent-up consumer demand is met.
Base metals rally eases
After posting strong price gains through the latter half of last week, base metals have been pulling back from recent highs at the start of the current week.
Gains were led by aluminum prices, which on 13 September hit a high since 2008, breaching USD 3000/t, although it failed to hold onto those gains at the market close thanks to profit-taking. SHFE aluminum prices were also strong, rising above CNY 23,000/t before pulling back.
Stanchart says it maintains a positive view on aluminum prices as supply disruptions in China driven by power shortages, and policies aiming at limiting emissions and energy use have been lowering current output and are likely to delay the start-up of new capacity.
In the past couple of months, China’s Yunnan province has notified aluminum smelters to limit output during September-December 2021 period to below August’s production levels, never mind the fact that Yunnan was already been negatively impacted by hydropower shortages that began in May when the province’s energy bureau ordered aluminium smelters to lower power consumption. Yunnan is the province from where the bulk of new aluminum capacity additions in China are most likely to come, owing to the province’s abundance of renewable power. Unfortunately, Yunnan has also been listed by China’s National Development and Reform Commission (NDRC) as one of nine provinces with excessive energy consumption. Stanchart says these factors imply delays to new capacity coming online in Yunnan.
Meanwhile, on-exchange aluminum inventories continue to decline. LME aluminum inventories clocked in at 1.30 million tonnes (Mt) are at end-August levels; SHFE aluminum inventories continue their downtrend, posting a 3.7kt net outflow in the week ended 10 September. At 228.5kt, SHFE inventories hover at the lowest since 1 January.
Aluminium physical premiums remain elevated on robust demand and higher freight
Costs, thanks to strong EV demand and sales.
The copper outlook is not quite as bullish.
Copper prices have lately come under pressure, backing off from recent highs on easing supply risk in Chile coupled with soft import demand from China. Further mine wage agreements have been reached in Chile in recent weeks, after the agreements reached earlier in September, at the Andina and Cesarones mines, thus easing supply concerns over potential strike risk.
China’s copper import demand remains weak, too, with the preliminary August
trade data showing unwrought copper and product imports declining for the fifth consecutive month, at 394kt down 41% y/y, the lowest monthly import figure since June 2019.
Stanchart remains bullish on aluminum prices but is generally bearish on base metals in the longer term.