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'Generally higher commodity prices' to emerge on China's new economic plan

Greenhouse gas and gold mines Nearly 1 ton of CO2 emitted per ounce of gold produced in 2019

Essential Metals & Mining Insights - September 2020

Essential Metals & Mining Insights - August 2020

State of the Market: Mining Q2-2020


'Generally higher commodity prices' to emerge on China's new economic plan

China's 19th National Congress of the Communist Party was a key focus last week as details emerged about measures the government seeks to implement to strengthen the economy.

In the U.S., the Senate adopted a 2018 budget resolution that could pave the way for rewriting the tax code. Prospects of U.S. tax cuts fueled investor sentiment both in foreign exchange and stock markets. Adding to market optimism, the October headline number of the New York Empire State manufacturing index and September home sales both surprised on the upside.

Meanwhile, Stanford University economist John Taylor is rumored to be a frontrunner for the role of Fed chairperson after making a favorable impression on President Donald Trump.

Increasing tensions between Iraqi and Kurdish forces supported the crude oil price.

In Europe, leaders of the U.K. and other nations of the bloc met for continued Brexit talks. However, little progress was made at the meeting in Brussels. In Spain, tensions between Catalan separatists and the government in Madrid continued to deepen after the latter announced it is seeking to take back powers from the autonomous region.

Price ring

For the first time since August 2014, the London Metal Exchange three-month copper price broke through the US$7,000/tonne mark Oct. 16, reaching an intraday peak of US$7,177/t. Key drivers for the move were expectations of strong Chinese GDP and loans data alongside talk that Chinese traders will no longer be permitted to import copper scrap from 2018.

However, copper edged lower later in the week as the greenback strengthened and closed at US$6,934/t on Oct. 20, up 1.1% compared to the prior week.

Alongside copper, nickel was the only base metal that held up in positive terrain on a weekly basis, gaining 0.6% to US$11,676/t. On Oct. 20, the nickel price surged to its highest in six weeks on the back of projections that the market will face widening deficits.

Aluminum was down 0.5% to US$2,129/t even though prices were spurred by news that Xinfa Group, one of China's top aluminum producers, will have to close 381,900 tonnes per year of smelting capacity this winter.

Zinc dropped as much as 3.8% to US$3,170/t, lead retracted 2.0% to US$2,491/t, and iron ore remained widely flat at US$62.5/t.

Precious metals booked strong gains across the board. Palladium jumped a staggering 7.4% to US$991/ounce, while platinum was up 3.2% to US$946/oz. Silver increased 3.2%, closing the week at US$17.4/oz, while gold shifted 2.1% higher to US$1,304/oz.

Talking points

The global metals and mining industry could be set for a new cycle of high commodity prices amid signs that top consumer China will continue to accelerate its measures to control metals supply dynamics.

In the opening speech of China's 19th National Congress of the Communist Party last week, the general secretary of the party's Central Committee, Xi Jinping, said supply-side reforms remain a major focus as China aims to develop a modernized economy in a 30-year program running from 2020 to 2050.

In a bid to achieve "better quality, higher efficiency and more robust drivers of economic growth," the secretary promised to continue efforts to cut overcapacity, reduce excess inventory, deleverage, lower costs and strengthen areas of weakness. He also pledged to aim for a "dynamic balance" between supply and demand by improving the allocation of available resources and increasing high-quality supply. As it seeks to improve environmental standards, China looks to enforce a low-carbon, green economy.

Analysts at RBC Capital Markets viewed the concept as a potential trigger for "generally higher commodity prices."

"The re-iteration of supply-side reforms as a key policy is not a surprise, but certainly suggests that some of the recent changes we have seen to metals supply dynamics are likely to continue and increase in force," the team wrote in an Oct. 18 note. "The structural reform of Chinese overcapacity has the potential to significantly alter current equilibrium levels and in general will mean higher utilization rates globally in industries such as steel and aluminium and others. This should translate into generally higher commodity prices."

Financings

Toronto-listed Lundin Mining Corp. announced plans to redeem all US$550 million of its outstanding 7.50% senior secured notes due 2020 on Nov. 20 at 103.75% of the principal amount plus accrued and unpaid interest. The move will save the company US$41.3 million in annual interest payments.

Osisko Gold Royalties Ltd. increased the size of a bought-deal offering of convertible senior unsecured debentures to C$284 million, from an initial C$260 million. The debentures carry an interest rate of 4% per annum, payable semiannually and maturing Dec. 31, 2022. Proceeds from the transaction will be used to acquire precious metal royalties and streams and for working capital and general corporate purposes.

Warrior Met Coal Inc. looks to raise US$350 million via a private offering of senior secured notes due 2024. Alongside cash on hand, the proceeds will go toward a US$600 million special cash dividend payment to all of its stockholders.

Sheffield Resources Ltd. secured a US$200 million debt finance facility package to develop its Thunderbird mineral sands project in Western Australia. The company appointed Taurus Mining Finance Fund and Taurus Mining Finance Annex Fund as the mandated lead arrangers and underwriters.

First Quantum Minerals Ltd. agreed to a new US$2.20 billion facility, comprising 17 banks. It will replace an existing US$1.88 billion facility and was increased from a launch amount of US$2.0 billion due to significant demand in the bank market. According to the company, commissioning and ramp-up of its Cobre Panama copper property in Panama will better line up with the new deal.