Searing Heat to Weigh on China’s Metals Output and Steady Prices

Scorching temperatures across China are likely to suppress metals production and put a floor under prices that would otherwise be suffering from tepid demand.

Power rationing in a number of provinces to ensure air-conditioning needs could stymie the expected rebound in China’s refined copper output in August, according to Bloomberg Intelligence. Aluminum production may flatten, although the effect could be bigger if electricity shortages centered on Sichuan province spread to more important centers of supply like Yunnan to the south.

Soaring gas prices

Alongside the impact of soaring gas prices on metals output in Europe, the power cuts in China are providing “a layer of insulation against demand-side headwinds for the time being,” TD Securities said in a note. As the weather cools, metals like copper and nickel will become more vulnerable to drops in price, while “European smelter disruptions will continue to support the energy-intensive metals including aluminum and zinc into the winter months,” it said.

Stockpiles have shrunk

In the meantime, copper premiums in China have firmed and stockpiles have shrunk, despite the weakness of the economy, as Sichuan contends with its worst drought in more than a half century. The southwestern province hosts about 2% of China’s aluminum capacity, but it’s a major hub for producing polysilicon used in solar panels and lithium chemicals used in electric vehicle batteries.

So far, the impact of the heatwave on the province and nearby regions affects an area accounting for less than 10% of China’s GDP, according to Bloomberg Economics, which suggests the crisis could be relatively short-lived. “In comparison, at the height of last year’s power crunch, about two thirds of the economy was hit by power restrictions of varying degrees,” it said.