Analyst Colin Hamilton noted that inventory levels for industrial metals had reduced over the past couple of years due to a stronger than expected recovery from the pandemic and weakness in scrap metal markets due to logistical constraints and political moves.
“This has left base metals in bona fide deficits, with inventory draw required to balance the books,” he said.
“However, the net result has been inventory levels critically low in many cases.”
London Metal Exchange zinc inventories are at the lowest level since 1989 at just 28,000 tonnes.
While the March quarter is typically the weakest period for demand due to the Northern Hemisphere winter, Chinese New Year is earlier than usual in 2023, falling on January 22.
“Hence, we expect factories to be back at work by mid-February, particularly those looking to benefit from reopening demand and/or policy support for the property sector,” Hamilton said.
“Thus, the period of inventory build in Q1 may be shorter in duration than is normal, over and above starting from a lower level.
“This raises the potential for inventory scarcity into the typical peak demand period of April-May, when inventories typically draw.”
Hamilton said market dislocations from low inventory cover could be dramatically amplified by financial markets, particularly in physically deliverable contracts such as those for the base metals.
“Obtaining metal to physically deliver against contract expiry has arguably never been more challenging,” he said.
“Not only is the overall on-exchange inventory low, but that available on-warrant is even lower by the time cancelled warrants are taken into account.
“With this, particularly should we see inventory decline into March-April, and base metals could be susceptible to short squeezes and blow-outs in the near-dated spreads, with available inventory insufficient to meet the needs of those seeking it for delivery against expiring positions.
“This should also leave metal premiums for prompt delivery well above historical norms, even as freight costs ease.”
Hamilton said it was not a comfortable time to be a metals consumer.
