Base metals decline amid signs of rising output in China

Selling re-emerged across commodity markets, as technical indicators suggesting several commodities were in overbought territory have seen investors liquidate positions. This saw the ANZ China Commodity Index end the session down 1.4%, with most sectors coming under pressure. Bulk commodities led the gains, with iron ore falling sharply. Industrial metals were also weaker, led by sharp falls in copper and nickel. Brent crude futures fell, dragging the energy sector lower. Precious metals was the only sector to end the session higher, with gold rising sharply as the USD weakened.

Crude oil fell as investors continued to lock in profits following the recent rally. Brent crude had hit a two year high of USD71/bbl earlier this week after Houthi rebels from Yemen launched a drone attack on the Ras Tunura terminal. This follows on the back of OPEC’s decision to extend production cuts. The decision to keep quotas unchanged signals the group’s intent to drawdown inventories further, without concern of overtightening the market. However, with the relative strength index sitting in overbought territory, it wasn’t long before the selling emerged. The slightly bearish sentiment also didn’t help, with the market expecting US crude oil inventories to rise for the third straight week when IEA releases its weekly report. The impact of higher prices on supply was also brought back into focus after Chevron said it plans to ramp up investment in the Permian Basin through 2025. The EIA also raised its domestic oil production forecast to an average 12mb/d in 2022, faster than previously expected.

North Asia LNG prices rose amid strong buying from Chinese buyers. The JKM April contract inched higher, rising 0.2% to USD6.01/mmbtu. Moves in longer dated futures were much stronger, with the May contract up 5.6% to USD6.275/mmbtu. Chinese buyers including Dongguan Daosen and Guangzhou Gas have ramped up their spot purchases this month, focusing on April cargoes as the outlook for demand improves. The market has also been supported by ongoing supply issues. LNG production at Russia’s Sakhalin plant remains impacted by the breakdown of an onshore gas pumping unit. It’s expected to remain at half capacity until early April. In Australia, Chevron’s Gorgon Train 1 and Wheatstone Train 1 remain under repair. This is expected to drive Australian exports down 6% y/y in Q1 2021.

Falling risk appetite amongst Chinese traders has weighed on base metals, with copper leading the sector lower. The red metal fell more than 2.4% amid signs of rising supply. Refined copper output from China rose in February to 821.8kt, up 20.3% from last year, according to Shanghai Metals Market. This follows on from a report earlier this week which showed that Chile’s export revenue rose 42% m/m in February. Nickel was also under pressure, as investors continue to assess the impact of Tsingshan Holding Groups announcement that it can convert nickel pig iron into matte for use in EV batteries.

Gold jumped the most in two months as a weaker USD stoked investor interest in the precious metal. A rally in bonds also supported the market, with the yield on 10 year Treasuries falling 5bps to 1.54. Higher yields and a stronger USD have been a significant headwind for the gold market in recent weeks. This has also seen investor sell from gold-backed ETFs, with holdings falling to their lowest level since June. However, with President Joe Biden’s USD1.9tn stimulus package on the verge of being approved, inflation expectations are also rising.

Iron ore futures came under pressure following further restrictions on steel output in China. Authorities in Tangshan ordered more industrial enterprises to halt or cut output to counter heavy air pollution. This is raising concerns that demand for raw materials such as iron ore will be impacted