LME

Tin supply is tight on the London Metal Exchange, but is this an isolated issue or just one example of a more far-reaching dilemma?

Writing for Reuters, Andy Home cites LME tin at its lowest level in 20 years, but it’s important to look closer as any comparison to two decades in the past is null and void as the global metals market and LME’s place in it are so different now.

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Home writes: “Unsurprisingly, low inventory is once again generating tightness across short-dated time-spreads, extending a pattern that has been running for a couple of years now.”

He adds that tin price is underperforming as well, currently trading just under $20,000 per ton. This is a 5% decrease when compared to the start of the year, placing it with nickel as the worst performer among significant LME metals.

However, Home writes that there is now more tin inventory in Shanghai Futures Exchange warehouses than in the LME system. Read more

Copper prices took a hit in May because of a surge in LME inventories. Or… was it because of that?

I’ve pointed out this before, but people continue to talk about copper stocks to explain price movements. LME inventories rose in May by 64,000 tons, or 25%, at the same time that prices fell. But that’s simply a coincidence.

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

Most of the time, inventory inflows and outflows can simply happen because traders move metal from one destination to another to profit from price arbitrages. Indeed, in November copper prices climbed 20% while LME stocks rose by more than 90,000 tons. I would argue that inventory levels have no predictability on price trends. But then what drove copper prices down?

China to Halt Credit Growth

China is putting efforts on halting risky lending and rising borrowing costs in order to limit credit growth. Interest rates in China have risen to the highest level in two years while the country’s tough talks on curbing credit are expected to put the brakes on credit growth.

As I wrote last week, “the noticeable tightening in Chinese monetary policy is bad news for property markets in China. The country has also pledged to halt risky local funding on the construction of infrastructure projects. Investors know that this will hurt demand for commodities and industrial metals.” Read more

Set of copper pipes of different diameter lying in one heap

Copper on the Shanghai market traded lower this week with investors choosing equities and oil, an area where a domestic rally was overflowing into Asian markets.

According to a report from Reuters, three-month copper on the London Metal Exchange did find some support, trading 1.1% higher, which offset losses from the previous session.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Subscribe to our monthly buying outlook reports!

However, the Reuters report also stated that LME copper stayed close to the four-month lows reached earlier this week as the market suffered from weak demand stemming from China and falling imports.

The most popular copper contract on the Shanghai Futures Exchange slipped to $6,558 a ton, Reuters reported, a decline of 0.71%.

Copper Bears Take Over

Just this week our own Raul de Frutos wrote of the commodity outlook shifting for copper buyers, as well as buyers of aluminum, steel and tin, and that the bears are taking over:

de Frutos wrote: “About a month ago I noted that while industrial metals were on the rise, commodities were range-bound, a sign of sluggish global demand. As I had written, ‘a healthy bull market in base metals should be accompanied by a bull market in other commodity markets.’ Commodities not only have struggled to make new headway but in the past few days they weakened significantly. Recent moves in China have caused a significant shift of sentiment in financial markets.”

de Frutos cited several issues, including oil prices taking a dip and China curbing its credit, to signal that the bull market for commodities might be coming to an end.

How will copper and base metals fare in 2017? You can find a more in-depth copper price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:

Most aluminum consumers seem quite content with the range-bound behavior of the light metal over recent months.

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Aluminum on the London Metal Exchange has been trading broadly between $1,700 and $1,750 per metric ton for much of the fourth quarter. Maybe not to the same extent as copper or zinc, but aluminum along with most of the base-metal sector benefited from renewed investor interest as 2016 went on. Although net long positions have been trimmed back following some recent significant deliveries into LME warehouses, the consensus remains positive regarding prices for 2017. Read more

Many active investors in the aluminim market will have watched, perplexed and confused, as to why the London Metal Exchange price continues to rise, yet the fundamental reality is one of, if not an oversupplied market, at least one with no shortage of metal in storage.

MetalMiner Price Benchmarking: Current and Historical Prices for the Metals You Buy

Producers will claim some credit for cutting capacity and talking up demand, which — to be fair — both positions hold some water. Western smelters in the U.S. and Europe have been relentless in cutting uneconomic refining in the face of weak prices.

Aluminum Smelter Closures

Source: CRU

This graph from CRU shows the steady demise of the U.S. primary aluminum smelting industry and you only have to Google “closure of aluminum smelters” or something similar and you will get a litany of stories about smelters being closed or facing imminent closure around the world.

Production Overseas

At the same time, though, production in the Middle East has jumped from 0.9 million metric tons (mmt) in 1999 to an expected 5.7 mmt this year, and Chinese primary production has skyrocketed from 2.6 mmt in 1999 to reach 31.2 mmt in 2015, with more to be added in 2016. Read more

Copper has been on a bit of a roll this month. After a quiet summer, investors have been looking at growing concentrate imports in China and increased refining to pure copper as signs that Chinese demand is picking up.

MetalMiner Price Benchmarking: Current and Historical Prices for the Metals You Buy

A recent article by Reuters throws some light on what is going on behind the scenes that suggests while demand from refiners is robust, it does not mean demand from China’s consumers is equally as strong and rising imports should not necessarily be seen as a bullish sign for copper.

Copper Price

Source: Kitco.com

The metal had hit a four-week high last week, approaching $4,800 per metric ton after better-than-expected Chinese data lifted sentiment. Read more

After a gap of 30 years, the London Metal Exchange is, in collaboration with the World Gold Council, getting back into precious metals. Not just because it sees an opportunity, but because the industry is in desperate need of an efficient and professional marketplace following the departure of principal banks from London’s Gold Fix in the wake of the Libor scandal and suggestions the Gold Fix could be manipulated.

Free Download: The July 2016 MMI Report

The LME announced this week it will launch centrally cleared gold and silver contracts on a platform called LMEprecious in the first half of next year, followed by platinum and palladium.

Gold bars

Gold will trade on the basis of London good-delivery 99.5% bars in 100 ounce lots. Source: Adobe Stock/misunseo.

According to Bloomberg, the new contracts are designed to complement London’s $5 trillion over-the-counter gold and silver market and will include contracts for spot, daily and monthly futures, options and calendar spread contracts, according to the statement.

Who’s Got the LME’s Back?

Trading house OSTC and banks Goldman Sachs Group Inc., ICBC Standard Bank Plc, Morgan Stanley, Natixis SA and Societe Generale SA will co-own the LMEprecious platform and will act as liquidity providers and some 30 firms have expressed a desire to be engaged from the initial offering. Read more

OPEC oil export revenue is down and if Hong Kong Exchanges and Clearing Ltd. can’t bring China to the London Metal Exchange, it’ll bring the LME to China.

OPEC Export Revenues Down Again

OPEC’s full-year 2016 oil export revenues will probably fall 15%, down for the third straight year and possibly the lowest in more than a decade before rising in 2017, the U.S. Energy Information Administration (EIA) said on Wednesday.

Free Download: The June 2016 MMI Report

Members of Organization of the Petroleum Exporting Countries (OPEC), including Iran, will likely earn about $341 billion in 2016, about 15% below 2015 levels, based on projections of global oil prices and the group’s production levels, the U.S. government’s EIA said in a report.

HKEx Tries Bringing the LME to China

Some four years after shelling out a top-of-the-market $2.2 billion for the London Metal Exchange, it appears owners Hong Kong Exchanges and Clearing Ltd. (HKEx) are still battling to make the venerable old Western institution work with China, the new and dominant center for metal demand.

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HKEx Chief Executive Charles Li used the LME Week Asia seminar today to tout the latest plan, which involves bringing the LME’s expertise in physical metals markets to China, where financial instruments dominate trade.

The fact the CME Group is looking to expand its warehouse network should come as no surprise, the fact it has taken it so long to do it should.

Free Download: The May 2016 MMI Report

The market has been ripe for CME to expand the physical delivery locations for the metals it trades in the wake of the last few years furor over long load-out queues at certain London Metal Exchange warehouses across the U.S. and Europe.

LMEring_550

Should the CME Group add a physical trading ring with red couches? Source: London Metal Exchange.

If the CME had a wider network with more tonnage in storage five years ago then, arguably, some of the LME warehouse operators would not have been able to game the system to the extent that they did. The recent launch of zinc and lead contracts by the CME has presumably been a spur to add more locations. Zinc was added last year and lead followed earlier this year.

Dynamic Approach

Yet, a new dynamism in the CME’s approach in recent years is also in evidence. The CME clearly has intentions to take on the older LME’s dominance of the physical trade market, particularly outside the CME’s home base of the U.S. Read more

Our Editor, Jeff Yoders recently reported on the launch of the CME Group’s new alloy 380 aluminum alloy contract, a product many in the domestic market have been eagerly awaiting and consider long overdue.

Two-Month Trial: Metal Buying Outlook

Historically, consumers would have hedged their alloy ingot requirements against the London Metal Exchange contract but as the LME’s aluminum benchmark became increasingly disconnected the casting industry all but boycotted the LME’s Primary HG contract, making the case for the CME to step in even more compelling.

From a high point in 2011 the LME aluminum alloy contract has plunged in popularity with volume down year after year.

Source: LME Data

Source: LME Data

Although nearly all traded volumes are down in recent years on the LME, aluminum alloy has fallen further than most. The exact reasons for the LME’s wider decline in volumes is a subject of some debate.

The ‘Right Trades

Reuters recently reviewed several reasons, one of them is the rise of activity on the Shanghai Futures Exchange. This year the SHFE has seen an explosion in traded volumes although not of the kind the LME would have welcomed. The SHFE volumes have been driven by highly speculative trades. Worse still, much of it is retail in nature.

This has the effect of distorting real price discovery and would undermine the foundation of the LME which was set up and has operated for a century or more on the basis of price discovery for producers, processors and consumers, not what many unfamiliar with the market have on occasion alleged, to speculate.

Free Download: The May 2016 MMI Report

Increasing volumes on the CME pose more of a threat to the LME in terms of providing reliable price discovery and hedging for the trade, particularly in the North American market. Where the SHFE is so dominated by the speculative element, the CME’s cornerstone is more from trade participation… much like the LME.

Who Will Use the New Alloy Contract?

The CME’s aluminum alloy contract is not likely to garner support or participation from outside the North American market, but for consumers in the U.S. it should provide a welcome hedging and price discovery tool. Even if LME aluminum alloy volumes stabilize at current lower levels the CME, with a contract focused as it is on a specific part of the U.S. manufacturing base, has a solid role to play in the years ahead.