Energy crisis hits demand for metal

October 12, 2021 (MLN): The leading economies are passing through a severe phase of energy crisis amid surging demand coupled with supply bottlenecks. The hiking commodity prices have left everyone baffled about the energy supply in months to come as the winter season is approaching.

However, the other side of the coin portrays some relief for the manufacturers as the prices of copper and scrap are declining which may be a significant source to cut the production cost.

Power prices have risen to record highs in recent weeks, driven by energy shortages in Asia, Europe, and the United States as the pace of economic recovery from the COVID-19 pandemic has supercharged energy demand.

The situation would likely push downstream consumers to reduce production, which will eventually lower the demand for the metal.

Three-month copper on the London Metal Exchange fell 1.5% to $9,404 a tonne by 0309 GMT, while the most-traded November copper contract on the Shanghai Futures Exchange rose 0.5% to $10,829.37 a tonne, tracking overnight gains in London.

LME aluminium declined 1.1% to $3,029 a tonne, zinc was down 0.6% at $3,210 a tonne and tin decreased 1.6% to $35,800 a tonne.

ShFE aluminum rose 1.4% to 23,345 yuan a tonne, zinc advanced 1.9% to 23,640 yuan a tonne, while tin dropped 2.2% to 276,970 yuan a tonne, as noted by Reuters.

The sentiment was also dented by the People’s Bank of China withdrawing liquidity, the trader said, signaling a potential pullback in economic stimulus.

Another missed debt payment by property giant China Evergrande also hit confidence in the Chinese real estate sector, which consumes a large number of metals.

However, cushioning further falls in metals prices are worries of a disruption in metals production due to the same energy crisis as well as rising interest in owning metals as a hedge against inflation.

Furthermore, partial closure of steel and metal manufacturing facilities are on the cards with looming power shortage in the EU and China could force countries to shut down or cut production of energy-intensive industries, a report by AKD Securities highlighted.

The report also incorporated average scrap prices of $435 for FY22 and $375 per ton for FY23 against the $360 per ton average for FY21 and copper prices of $9000 per ton for FY22 and $8700 per ton for FY23 against $7500 per ton average for FY21.

With regards to local rebar prices, the report stated that the prices of Local rebar remained flat in the month of September’21 to stand at 179-180K/tons, following a 14%MoM increase in August’21 due to higher freight cost, PKR devaluation, and higher electricity cost.

Moreover, the news concerning slashing duties on scrap is gaining momentum but the government is yet to confirm or give any clarity on it. However, any benefit associated with the removal of duties will be pass on, resulting in the reduction of local rebar prices. Currently, 5% regulatory duty and 2% additional custom duty are imposed on imported scrap.

Despite higher rebar prices and manufacturers’ ability to pass on the costs, the steel sector has underperformed by 6.1% and 11.9% in CYTD and FYTD compared to the KSE-100 benchmark, up by 1.6% in CYTD while dropped by 6.1% in FYTD following the economic uncertainty and geopolitical tension.

Indicating the outlook of the sector, Mohsin Ali, Investment Analyst at AKD Securities said, in the near term, the companies’ earnings will remain robust on the back of higher rebar prices as the same had witnessed a 15.4% increase in 1QFY22 which benefits local manufacturers in passing through the cost such as higher freight, electricity cost, and PKR depreciation.

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