Weak demand hits non-exchange traded metals

The price of non-exchange traded metals such as ferrochrome and manganese, which provide the best picture of underlying supply and demand, have fallen significantly over recent weeks, in a sign of weakening consumer demand.

Metals traders pay close attention to commodities because they are bought and sold privately between producers and customers. They are therefore less influenced by short-term speculative flows and tend to be less volatile than metals such as copper and aluminium which are traded on exchanges.

The price falls in the physical metal markets, caused by buyers drawing down on their inventories in the face of short-term drops in apparent demand, strike a pessimistic note for overall industrial metals markets, analysts said. “The rollover under way now is potentially very bearish,” said Colin Fenton, chief commodities strategist at JPMorgan in New York.

Glencore, the world’s largest commodities trader, told analysts at a seminar about its trading division that it had seen a “modest” slowdown in commodities demand.

Metals and ores such as ferrochrome, cobalt, molybdenum, magnesium, rhodium, silicon, iron ore and alumina are traded between producers, physical traders and consumers. Financial speculators play a small role in those markets.

After holding relatively steady amid the commodities market sell-off in the summer, prices of key non-exchange traded metals have weakened over the past few weeks, in some cases approaching the lows seen during the 2008-09 financial crisis.

Silicon, used in special alloys, has fallen steadily since the middle of this month to $2,350 a tonne, a two-year low. Magnesium has fallen 6.5 per cent since it started its decline at the start of November to Rmb17,350 a tonne. The benchmark Chinese ferrochrome price has fallen 22 per cent from the year’s high in February to Rmb7,500 a tonne.

Rhodium, used in the manufacture of liquid crystal displays, has fallen to $1,575 an ounce, the lowest level since late 2009. The metal has lost 18.5 per cent since August.

Although non-exchange traded metals reflect supply and demand fundamentals in the physical market, analysts warn that financial markets have some influence too through sentiment.

The London Metal Exchange index, a basket of the price of copper, aluminium, nickel, zinc, lead and tin, has fallen nearly 25 per cent since early August amid the eurozone debt crisis, prompting consumers of non-exchange traded metals to take a cautious approach. They have been refraining from buying, running down stocks instead.

Duncan Hobbs, senior commodities analyst at Macquarie, said the price drop in physical markets was overdone. “The ultimate end demand, I think, is better than current prices suggest,” he said.

But Mr Hobbs added that, with negative sentiment affecting both exchange traded and non-exchange traded metals, a price recovery was unlikely. “You’re not going to get any restocking until price expectations turn,” he said.