By Daniel Hynes
Commodities edged lower as weaker than expected economic data raised concerns about weaker demand. This was partly offset by supply disruptions due to high energy prices.
Zinc rallied after high energy costs in Europe forced further smelter closures. Nyrstar said it will be closing its Budel smelter in the Netherlands from 1 Sep until further notice. Zinc futures on the LME subsequently jumped as much as 7.2% to the highest level in two months following the news. Zinc production in Europe has been on a steady decline over the past 18 months as high energy costs have curtailed output. This has left LME’s European warehouses virtually empty of metal. We expect these supply issues to push the zinc market into deficit this year. Aluminium, another energy intensive metal, is also facing issues. China has experienced tight power markets amid soaring temperatures in recent weeks. Hydroelectricity has subsequently been impacted. This led the aluminium hub of Sichuan to announce it will prioritise electricity for residential use, putting aluminium output at risk.
Iron ore futures rose in Singapore after BHP painted a positive picture of Chinese demand. The world’s biggest miner said it will study plans to expand its iron ore unit due to a stronger demand outlook in China. CEO Mike Henry said China’s emergence from COVIID-19 lockdowns would prove to be a tailwind to the global economy.
The prospect of an Iran nuclear deal continued to weigh on crude oil prices. Brent futures fell 3.2% as talks between Iran and European Union negotiators signalled progress on a renewal of the 2015 agreement. EU mediators had circulated a final proposal last week. It has been reported that Iran’s response was constructive, and they are now consulting with the US on a way ahead for the protracted talks. Prior to the US pulling out of the deal in 2018, the OPEC producer was exporting around 2.5mb/d. Exports in 2021 were virtually zero amid sanctions. The oil market is unlikely to get much support from US producers amid ongoing disruptions. The EIA lowered its forecast for growth of Permian Basin shale oil output to 1.5% as cost inflation keeps a lid on output. Crude oil was already under pressure earlier this week after softer economic data from China.
European natural gas extended gains as soaring temperatures trigger higher than normal demand. Dutch front month futures closed 2.6% higher while electricity prices surged to record highs. The hot and dry weather is causing river water levels to drop rapidly, hampering the transport of fuels such as coal and diesel. This comes amid a worsening backdrop to the European gas crisis. The standoff between Russia and Germany continued. Germany’s Economy Minister, Robert Habeck, said a repaired Nord Stream pipeline turbine is available and the Russia is using the equipment as an excuse to cut supplies to Europe. Supply shortages in Europe have forced the UK to source LNG from Australia for the first time in six years.
North Asian LNG prices edged higher to reach its highest level in five months amid the global supply crunch. Japan/Korea Marker, the Asian benchmark spot LNG price, jumped above USD56/MMBtu. Asian buyers are moving to procure supply for winter. Japan’s top LNG importer purchased several spot shipments for delivery this winter via tender last week. This comes amid ongoing supply issues. Shell’s Prelude LNG facility in Australia is expected to remain offline into next month due to an ongoing strike.
Gold slipped as rising Treasury yields weighed on investor appetite. A slightly stronger USD was also a headwind for investor demand.
Data source: Commodities Wrap