Base Metals Surge as Energy Crisis Knocks Out More Supply

(Bloomberg) — The world’s most crucial metals continued on a breakneck surge as energy shortages forced more production cuts and piled pressure on manufacturers, fueling concerns about inflation.

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Producers of metals from zinc to aluminum and steel are restricting output due to power restrictions or rising energy costs that are outpacing surging metal prices. The latest victim was one of the top zinc producers Glencore Plc, with production at its three European plants being cut because of surging power prices.

Zinc spiked as much as 12% on the London Metal Exchange in response, the biggest jump since October 2015. Aluminum — a particularly energy intensive metal — also gained to take this year’s advance to 60%, while copper extended gains above $10,000 a metric ton. Friday’s moves came a day after London bourse’s benchmark index of six base metals reached a record high.

“Base metals are rallying amid an intensifying energy crisis, and heightened inflation fears are reigniting investor enthusiasm,” said Wenyu Yao, senior commodities strategist at ING Bank. “Fears of inflation could increase demand for metals as there is a perception that they are a hedge against inflation, which is especially true for copper. In the meantime, a retreat in U.S. real rates, along with the broad trade-weighted dollar index over the last couple of days, is also driving momentum.”

The supply disruptions come at a crucial juncture for the global economy, threatening to add more strain to creaking supply chains and fanning concerns that inflation risks may linger for longer than previously expected.

The supply curtailments started in China as the country restricted power to energy intensive industries, and have now spread to Europe as the region faces its own power problems spurred by record gas prices. That’s creating new demand worries as record raw material costs threaten manufacturing sectors around the world.

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Industrial and manufacturing companies around the world have cut earnings guidance in recent weeks, while major economies from Germany to the U.K. are growing more slowly then expected.

Glencore’s zinc cuts followed an announcement earlier this week that Nyrstar — another big producer — would reduce output at three European smelters by up to 50% due to rising power prices and costs associated with carbon emissions. Meanwhile, Matalco Inc., the largest U.S. producer of aluminum billet, is warning customers it may curtail output and ration deliveries as soon as next year amid a magnesium shortage. Steelmakers, including ArcelorMittal, have also cut production.

Copper, the most important industrial metal, also soared. It recorded the biggest weekly gain since 2016 and is in a widening backwardation as global inventories shrink due to demand recovery and pandemic-driven disruptions.

“As most metals are in backwardation and physical demand high, the ingredients are there for materially higher prices, most notably in aluminum and zinc but also permeating into the copper and tin market,” said Kieron Hodgson, an analyst at Panmure Gordon. “It is increasingly likely these prices may persist throughout the fourth quarter before the inevitable return-to-earth occurs.”

LME zinc settled 7.5% higher at $3,794.50 a metric ton as of 5:51 p.m. in London. All other main metals advanced, with aluminum rising 1.7% and copper up 3%.