Metals hurtling to new highs bring more pain for world's factories

London

BASE metals are rocketing towards all-time highs as the global energy crisis crimps supply from China to Europe, threatening more inflationary pressure from rising commodity prices.

Metals are extending a year-long rally as the global energy crunch deepens supply cuts across the complex. The LMEX index, which tracks the collective performance of the six main base metals, is on the cusp of setting an all-time high.

Zinc prices in London soared to their highest since 2007 the day after Nyrstar - one of the metal's top global producers - said it will cut output at three European smelters by up to 50 per cent due to rising power prices and costs associated with carbon emissions. Copper is also rebounding, while aluminium is heading for its highest close since 2008.

"Metal prices are set to stay strong during the fourth quarter, keeping the upside momentum for inflation," Xu Maili, vice research director at Everbright Futures Co, said by phone from Shanghai. "Against the backdrop of easy global liquidity, anything that brings imbalances to the market, such as the energy crisis, could trigger price spikes."

Strains in China are particularly evident, where factory-gate prices rose at the fastest pace in almost 26 years in September. It's a surge that could easily spill over to other economies given the nation's role as the world's largest exporter.

"It is zinc's turn" to surge as the energy crisis creates large-scale shutdowns or run cuts at smelters, said Jia Zheng, a trader with Shanghai Dongwu Jiuying Investment Management Co. Power curbs are also expanding to China's main zinc producing provinces, she said. Some Chinese smelters had already reduced runs as they grapple with an electricity shortage fuelled by record coal prices.

Zinc on Thursday (Oct 14) rose as much as 6.9 per cent to US$3,637.50 a ton, the highest since July 2007, on the London Metal Exchange, before trading at US$3,560 as at 7.05 am local time. In Shanghai, prices surged 7.1 per cent, their daily limit, to 25,700 yuan a ton.

Prices may stay elevated as the energy crisis continues to impact the metals market, researcher Shanghai Metals Market said in a note on Thursday. The surplus in the global zinc market is expected to narrow next year, according to the International Lead and Zinc Study Group.

Copper also spiked, with prices rising as much as 5 per cent in Shanghai amid signs of acute tightness in supply. The cash-to-three-month spread in London was trading at the biggest backwardation since 2012.

In ferrous markets, iron ore futures rebounded after sliding for the past two days. The contract in China is still heading for a weekly loss of about 2 per cent as new steel output curbs for early next year are set to hurt consumption. BLOOMBERG