Base metal complex extends further strength after the strong rally yesterday. LME lead for 3-month delivery, the best performer, jumps another +4.7% to 16-month high at 2387 after rising +7.8% Thursday. In China, the Ministry of Environmental Protection said in a report that it will ‘strictly enforce’ anti-pollution rules for non-ferrous smelters. Investors worry that aggressive closure of sub-standard smelters in China will result in supply shortage and this spurs massive buying recently.
We continue to believe that the concern is overblown. Smelter capacity in China, the country that accounts for 35% of global lead production, is excessive as many plants are idle or with low utilization. Closure of substandard plants will not only eliminate excessive capacity but also encourage smelters that are environmentally friendly to be put in operation.
However, as the market is very sensitive to supply disruption, further news about shutdown of plants will likely push prices higher. Indeed, investors who are trading with the ‘shortage’ theme can build long positions in zinc. Around 8% of China’s zinc supply comes from smelters also producing lead. If the shutdowns become widespread, zinc production will also be affected. Since mid-August, LME lead has risen almost +30% while zinc has gained +7%. At the massive buying yesterday, lead soared almost +8% but zinc added only +3.5%. As of yesterday’s close, spread between copper and zinc is around $380. Buying of zinc/lead pair can bring lucrative profits.
Gold price pulls back to 989 in European morning as bulls probably prefer to book in some profits after 2-days’ rally. Silver also retreats to 15.9. Rebound in USD should also have halted rises in precious metals. The market is waiting for US’ non-farm payrolls and unemployment rate for August. Consensus readings suggested that the country reduced payrolls by -225K during the month, compared with a decline of -247K in July. After an unexpected drop to 9.4% in July, the unemployment rate should have risen to 9.5% in August. UKs’ employment report is one of the most important data in a month as the Fed’s monetary policy is very much dependant on the job market. The surprisingly lower-than-expected decline in non-farms payrolls in June and August drove strong speculations on Fed rate hike and lifted USD. Therefore, we believe investors will want to get the employment data before taking any actions on the dollar.
Crude oil price recovers to 68.5 in European morning. However, the benchmark contract will likely record over -5% drop on weekly basis. Strength in stock markets indeed helps oil. In Europe, UK’s FTSE 10 Index adds +1% to 4843. Germany’s DAX and France’s CAC 40 also gain +1% and +0.6% to 5355 and 3574 respectively.
