Articles in Category: Investing Hedging

stockquest/Adobe Stock

This morning in metals news, the chairman of Chinalco says Chinese aluminum demand growth will stay ahead of the country’s GDP, a hedge fund is suing Barclays for over $850 million related to copper trading losses and a Chinese investor is placing big bets on copper.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Chinese Aluminum Demand Growth

According to Chinalco, China’s biggest state-run aluminum producer, consumption of the metal will  grow 9-10% this year, Reuters reported.

According to the report, strong downstream demand is a primary factor behind the uptick.

Ge Honglin, chairman of Chinalco, told Reuters that demand growth is expected to rise faster than the country’s GDP in 2018. China is targeting GDP growth of around 6.5 percent this year, but has not yet set a 2018 goal, according to the report.

Red Kite Suing Barclays

A hedge fund is suing for over $850 million related to losses in copper trading, Reuters reported Monday.

The hedge fund, Red Kite, is suing Barclays, alleging that it manipulated the copper market and ultimately resulted in $850 million in losses for the hedge fund.

Futures of Chinese Copper

There has been a sharp rise in Chinese copper futures bets — why?

According to one source quoted by Kitco, a private coal mining industry investor in China, Gelin Dahua Futures Co Ltd, is behind the surge.

Free Download: The October 2017 MMI Report

Gelin Dahua holds more than 35% of the open interest in copper contracts for the first half of 2018 on Shanghai Futures Exchange (SHFE), per exchange data referenced by Kitco.

Have you ever tracked a metal price and watched it peak or trough for no obvious reason? Or read of some fundamental development in the supply or demand landscape for the metal, only for the price to behave in some unexpected way?

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

You are not alone. A recent article in the Financial Times suggests that in at least some situations technological developments may be influencing price behavior in ways that they would not historically have done.

The Financial Times reports that automated trading systems (or algos) account for large volumes of transactions in commodity markets, with 49% of grains and oilseed trades handled by automated trades of one sort or another, 54% of precious metals and a whopping 63% of crude oil, quoting figures from the US Commodity Futures Trading Commission.

Some automated trades are simple buy or sell orders that are executed when the price reaches a certain level, but others are the result of sophisticated Blackbox algorithms that make decisions based on a multitude of variables known only to the developers.

The article quotes Doug Duquette, an executive at Chicago-based Vertex Analytics, whose software analyses automated market orders.

“The whole notion of fundamentals on any given day, for weeks at a time, months at a time, has completely gone out the window these days,” Duquette said. “You get momentum of algos playing upon algos upon algos, and it will just drive markets to extremes that don’t seem to correlate or line up with fundamentals on any given day or time period.”

While John Saucer, vice president of research and analysis at Mobius Risk Group in Houston, is quoted as saying “It makes it more difficult to be a purely fundamental trader. In the past you had to take into account fundamental considerations, technical considerations and seasonal considerations — I do think (now) you have to take into account transactional considerations and algos.”

The article and most sources are careful not to blame automated trades with fundamentally undermining the process of price discovery, but many acknowledge that the result of their rapid rise in use has been an increase in volatility and a skewing of liquidity to short-dated futures, leaving long-dated contracts lacking liquidity. Indeed, Ernest Scalamandre of AC Investment Management is quoted as saying that by withdrawing standing offers to buy or sell when another trader tries to transact with them, automated trades create a mirage of market depth — adding volume but not liquidity, he said.

For better or worse, automated trades are here to stay. With the rapid rise of artificial intelligence, automated trades are likely to get ever more sophisticated and come to dominate markets in years to come as hedge funds, speculators and even the trade turn to AI in an effort to reduce perceived risks, or simply to get one step ahead of the market.

Free Download: The October 2017 MMI Report

Where this leaves the rest of us remains to be seen. But it does appear that long-term fundamentals are likely to have less impact on short-term volatility compared to the actions of these automated trades than they would historically have done.

It won’t have escaped your notice that the shine has gone off the metals market.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Prices have been softening across not just metals but other commodities, like oil, too.

Consumers, of course, will not be complaining, but are nevertheless keen to understand what is going on and whether we are seeing a temporary dip or a move into a prolonged bear period.

Commodities in general are facing multiple headwinds.

While demand for iron ore and oil is steady, both markets are in oversupply. Oil prices have received short-term support from favorable comments around output cuts. Prices have subsequently continued to soften as long positions have been unwound and investors have concluded prospects of a supply balance are receding.

In China, the authorities have been squeezing investors by increasing shadow banking borrowing costs, resulting in positions being unwound and prices softening.

In the U.S., markets surged after President Donald Trump’s election victory with the expectation his campaign promises of trillion dollar infrastructure investment would create a building and consumption boom.

Since those heady days, the realization has set in that the desperately needed investment may not be quite as significant as first thought.

Read more

The London Metal Exchange aluminum price has risen steadily since this time last year and seemed at times like it may hit, if not breach, $2,000 per metric ton. Many consumers are asking how much further does it have to go? will it break that psychologically important barrier anytime soon? and if it does, how much further does it have to go?

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

To understand this, we should consider what has caused price strength in recent months and that you will not be surprised to hear is easy to list, but harder to judge to what extent each factor has had an impact.

Why is Aluminum Up?

First, there are general commodity category price drivers, nearly all base metals have shown price strength over the period as industrial demand has remained positive and surplus supply markets have either tightened or gone into outright deficit. In the case of aluminum, there are several indicators suggesting the market deficit has increased over the last 12 months. Physical delivery premiums have increased not just in Asia, but in the U.S. with the Midwest premium currently trading just below ten cents per pound on the CME Group exchange, up from six cents per pound in the third quarter of last year. Japanese physical delivery premiums have been agreed at $128 per metric ton for the second quarter up from $95 per ton for the first quarter.

Source: Reuters

Meanwhile, LME inventory continues to decline with almost 400,000 mt electing to leave the system in February alone. Now it must be said that not all this metal is destined for consumption, as Andy Home in a recent Reuters article points out, the majority of metal leaving the LME system is almost certainly heading to off-market lower cost storage options. Read more

Commodities and industrial metals have always moved in tandem. However, things have changed over the past few months. Industrial metals continue to rise in price while commodity indexes struggle to hit new ground.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

What’s up with that?

CRB commodity index (in orange) vs DBB industrial metals index (in black). Source: MetalMiner analysis of @Stockcharts.com data.

Two things have caused industrial metals to outperform the rest of commodity groups (agriculture, energy, etc) this year:

First, in November industrial metals got a boost as Donald Trump won the U.S. presidential election and his Republican party kept control of both houses of the Congress. Investors now hope that a Trump-led GOP government will boost domestic infrastructure, which could be a boon for industrial metals demand. In addition, the new president has stated he is willing to institute more measures to protect domestic producers.

China’s Pollution Performance

Second, and more importantly in my opinion, industrial metals have been benefiting from a tailwind since January when China’s pollution problems got worse. Steel and aluminum are leading this year’s rally. This is because these two are the most energy-intensive metals and China has shown a commitment to cut output. Read more

The Organization of Petroleum Exporting Countries in general, and Saudi Arabia in particular, have done the U.S. oil industry a massive favor, and they are probably ruing the day they tried to squeeze America’s shale industry out of existence.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

The collapse in oil prices that ensued after Saudi Arabia-led OPEC opened the spigots two years ago forced American companies, and their many subcontractors, to innovate in a way that would never have happened so fast or gone so far without the imminent threat of survival forcing the pace.

Oil Prices Allow Reopening of Old Wells

Now, U.S. shale producers have achieved economies of scale that allow them to return to previously closed wells in fields like Eagle Ford and achieve 30% returns even at $40 a barrel. U.S. explorers may be making hay in the domestic market, but huge potential exists for these same firms to take their technology abroad. Read more

The Architecture Billings Index returned to growth mode in February, after a weak showing in January. An economic indicator of construction activity, the ABI reflects an approximate nine-to-12 month lead time between architecture billings and construction spending.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

The American Institute of Architects (AIA) reported the February ABI score was 50.7, up from a score of 49.5 in the previous month. This score reflects a minor increase in design services (any score above 50 indicates an increase in billings).

ICE Delays London Gold Price Benchmark

Intercontinental Exchange (ICE) has delayed the launch of clearing for London’s benchmark gold price because not all participants in the auction will be ready, two sources involved in the process told Reuters on Tuesday. The delay could weaken its bid to become the dominant exchange in London’s $5 trillion-a-year bullion market, sources say.

 

The leaders of the Environmental Protection Agency and Department of Transportation said today that they will revisit Obama-era corporate average fuel economy standards on greenhouse gas emissions for 2022 to 2025 model cars and light trucks, a win for automakers that said the standards were too tough to meet.

Benchmark Your Automotive Steel Price by Grade, Shape and Alloy: See How it Stacks Up

President Donald Trump, speaking at the American Center for Mobility in Ypsilanti, Mich., went even further saying his administration would cancel Obama’s executive order establishing the standards outright.

“Today I am announcing we are going to cancel that executive action,” President Trump said. “We are going to restore the originally scheduled midterm review and we are going to ensure any regulations we have protect and defend your jobs, your factories. We’re going to be fair.”

The American Iron & Steel Institute, the largest industry association of steelmakers, which count themselves as important members of the automotive supply chain, praised the action.

“AISI is pleased the Administration has withdrawn the final determination of the EPA Light Duty Vehicle Emission Standards issued in January,” said Thomas J. Gibson, president and CEO of AISI in a statement. “As a key materials solutions provider, we look forward to a dialogue between EPA, National Highway Traffic Safety Administration, California Air Resources Board, auto manufacturers and other relevant stakeholders on the mid-term evaluation.”

The CARB’s inclusion is notable as California has said it will go forward with state emissions standards that are more stringent than the federal government’s, no matter if the federal CAFE standards are changed or not.

Federal Reserve Raises Interest Rates

For the first time this year, the Federal Reserve raised interest rates one quarter point to a range of .75% to 1%, a widely expected move following strengthening economic reports and signals from Fed officials.

After its two-day policy meeting, the Federal Open Market Committee voted to raise the range of the federal funds rate to 0.75% and 1.00%, citing progress in labor market growth, business fixed investment and inflation.

Two-Month Trial: Metal Buying Outlook

“In view of realized and expected labor market conditions and inflation, the Committee decided to raise…the fed funds rate,” the central bank wrote in its statement.

One member of the committee, Minneapolis Fed President Neel Kashkari, voted against the decision, preferring to keep the federal funds rate between 0.50% to 0.75%. Kashkari is a new voting member of the FOMC this year.

If I was a copper miner, I would be rubbing my hands because copper prices are looking healthy as a horse.

Supply Disruptions

Workers at Cerro Verde mine in Peru walked out on Friday, “halting output of 40,000 metric tons per month in a dispute over labor conditions,” according to news.com.au (here’s a video interview and analysis I did about it for Swiss Financial Television). The strike stretched into its fourth day yesterday after a meeting between the union and management failed to resolve it on Monday. “The mine is currently making about half as much copper as it normally does, because owner Freeport-McMoran hired contract workers to operate key areas,” said a union official as quoted by Reuters.

Benchmark Your Current Copper Price by Grade, Shape and Alloy: See How it Stacks Up

On top of this, disruptions at the world’s two largest copper mines, Escondida in Chile and Grasberg in Indonesia, are causing them to “lose production daily due to a strike and an export ban respectively,” according to Reuters.

The Technical Picture

Three-month London Metal Exchange copper. Source:MetalMiner analysis of fastmarkets.com data.

The technical picture is important because it tells a lot about what buyers and sellers are doing. Copper rose nearly 30% in November. Usually, after such a huge run it’s normal to see some selling but we haven’t really seen that yet.

Two-Month Trial: Metal Buying Outlook

Since November, prices are holding pretty well and that’s a sign that bulls are still in control. A sharp price decline in oil prices last week would normally bring other commodities down but copper held its ground well. The red metal continues to make higher highs and higher lows, a textbook definition of a healthy uptrend.

What This Means For Metal Buyers

The diagnosis is that while copper’s bull market doesn’t show real signs of weakness, we continue to expect further upside moves. Buyers should keep an eye on the ongoing supply disruptions because they could hurt your budget.

After rising aggressively, some would argue that lithium prices have already peaked.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Reuters quotes Paul Robinson, director at consultancy CRU Group saying that prices have little upside because demand growth has been met with aggressive supply build up, similar to rare earths and vanadium in past cycles. Even though demand is projected to soar 60% to 300,000 metric tons of lithium carbonate equivalent (LCE) annually by 2020, the newspaper quotes a National Bank Financial report saying new players could flood the market.

Strong Demand is Company, 60% Growth is a Crowd

“It’s crowded, no doubt about it, and it will get culled,” said Jon Hykawy, president of Stormcrow Capital, calling lithium, the “latest bubble sector.”

An indication of extent to which lithium fever has gripped investors and junior miners is illustrated in a Bloomberg article which reports that in the wake of President Mauricio Macri’s decision to remove currency and capital controls and taxes introduced by his predecessors, about 40 foreign companies began to consider opportunities in Argentina’s mining industry. More than half of those planning to mine lithium. Read more