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.
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.
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.
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.
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.
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.
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 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.
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 ClearingLtd. (HKEx) are still battling to make the venerable old Western institution work with China, the new and dominant center for metal demand.
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.
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.
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.
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
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.
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.
Iron ore, steel and non-ferrous metal markets in China — and by association the London Metal Exchange after opening — dropped following a decision by futures exchanges in Dalian, Shanghai and Zhengzhou to increase trading margins and fees. The most-traded contracts were down up to 4.6% in response.
Some Commodities Are Actually in Short Supply
Not all commodities dropped. Some experienced genuine supply tightness, such as coking coal wherein many of the domestic mines and ovens closed last year due to low prices, and bucked the reversal. Coking coal continued to rise and although iron ore did fall back. The fundamentals are a little more supportive following announcements by producers that they will limit output, but, in truth, even iron ore’s price increases are more due to speculative bullishness than a genuine tightness of supply. Read more
The London Metal Exchange‘s Hong Kong owners have seen revenues soar for the venerable metals exchange and Vale SA and BHP Billiton may have reached a deal with the Brazilian government over the deadly Samarco mine disaster.
LME Revenue Soars
The London Metal Exchangeposted a 36% jump in revenue for 2015 to $223.15 million, as higher trading fees and tariffs helped it offset a drop in volumes, its owner — Hong Kong Exchanges and Clearing Ltd.— said on Wednesday.
The revenue gains at its London unit were a key contributor to HKEx record net profit last year, showing the payback has begun from its $2.2 billion buyout of the 139-year old metals exchange near the height of the commodities boom in 2012.
Samarco Owners Reach Deal With Brazil
Samarco Mineracao SA will pay at least $5 billion over 15 years as part of a deal reached with the Brazilian government to settle a lawsuit for damages caused by a deadly dam spill at a mine in November, a government source told Reuters on Tuesday.
Both OPEC and LME are dealing with unexpected price stability this morning.
Oil Output Falls
Organization of Petroleum Exporting Countries oil output has fallen in February from the highest monthly level in recent history, a Reuters survey found on Monday, due to a halt in Iraq’s northern exports and outages in other producers.
The survey also found stable output in top exporter Saudi Arabia, an early sign that Riyadh is delivering on a Feb. 16 deal along with Venezuela, Qatar and non-member Russia to freeze output and support prices, which hit a 12-year low last month.
The London Metal Exchange on Monday confirmed that it will explore the idea of capping warehouse rent because the proposed rises from April are much higher than in previous years.
The LME said it plans to publish a discussion paper outlining its options on “Charge Capping” in mid-March. “The LME is proposing, at a minimum, to explore the possibilities for implementing a longer-term solution to high charges.