In this respect, copper is similar to more extreme positions for aluminium and zinc. The U.S. is short of physical inventory relative to the LME. Even LME inventory is skewed to Asian rather than European warehouses, as we reported last week when looking at the aluminum market.
The CME’s Comex and London Metal Exchange (LME) are squaring up for the industrial revolution that is electrification, according to recent posts by Bloomberg and the Financial Times.
Both exchanges are busy developing and, more importantly, marketing products that cater to industry’s need to hedge exposure to forward prices for key battery ingredients. Whether for car batteries, electronic goods or power grid storage, the key metals are demanded by a common technology: lithium-ion batteries.
Despite being in the works for months prior to the onset of the pandemic, the LME’s program of reporting warehouse inventory in “near storage” — meaning in LME warehouses but not on warrant — could hardly have been more timely as a fierce, if temporary, recessionary situation hit metals markets this year.
A recent Telegraph article takes a more balanced approach to review goings-on at the London Metal Exchange (LME) amid accusations that have been leveled against some major market players that they were instrumental, or at least complicit, in the manipulation of the nickel market last year.
LME nickel prices continued to move sideways overall, while slowly dropping from price surges that hit the metal recently due to future supply concerns.
Since hitting a peak closing price of $18,100 in early September, prices dropped by around 10% during the past two months.
Source: MetalMiner analysis of the London Metal Exchange (LME) and FastMarkets
Based on a longer-term look at price data, prices exceed an eight-year average price of $13,572/mt (corresponding to the graph’s timeline) which is represented by the blue line:
Source: MetalMiner analysis of the London Metal Exchange (LME) and FastMarkets
Trading volumes tapered off during recent weeks, indicating sideways movement could continue.
Prices still remain high compared to the longer-term average; therefore, prices could also continue to drift lower, although some analysts expect prices to remain high.
In fact, over the long term, prices keep rising, with price bottoms progressively rising since 2016.
SHFE Nickel Prices Drop Slightly from September High Prices
Like LME prices, SHFE nickel prices remained higher but drifted back down from recent high prices.
Source: MetalMiner analysis of FastMarkets
Since hitting a peak high of CNY 146,850/mt in early September, SHFE nickel prices dropped back by around 11% over the course of roughly two months.
The SHFE nickel price dropped to CNY 130,320/mt in early November.
Global Supply Chains React to High Nickel Prices
China’s Jinchuan Group recently commented that its mine in Qinghai would help supply the company this year. Therefore, the export ban on Indonesian mined nickel will not impact the company’s operations significantly, according to Reuters.
The company’s joint venture laterite project in Indonesia ramped up this year, with the first ferronickel output in sight. However, an official launch date for the project, which is expected to have an annual capacity of 10,000 tons, has not yet been announced.
Mining output from the Philippines looks set to pick up, helped by higher prices. Higher prices make compliance more affordable as the country seeks to transition away from open pit mining. The government continues to regulate the industry stringently, constraining expectations of large output gains.
Tsingshan Holding Group Co., a top Chinese stainless steel producer, faced scrutiny recently for making large purchases of nickel from LME warehouses.
Chinese stainless competitors accused the company of manipulating the market, while the company could have made the advanced purchases to shore up future stocks ahead of the 2020 Indonesian export ban.
At any rate, large rounds of nickel purchases by the company appeared to impact prices; the situation is under examination by the LME.
China’s Stainless Sector Expected to See the Biggest Impact of 2020 Nickel Shortage
Given that most nickel ends up in stainless steel production, and since the majority of stainless steel gets produced in China, stainless steel production will be a key area impacted by a nickel shortage. The uptick in production in the Philippines is not expected to fully compensate for a drop in Indonesian supply.
According to data from the International Stainless Steel Forum (ISSF), stainless crude output increased in H1 2019 by 1.9% compared to H1 2018. That increase came entirely from China, with an 8.5% production expansion to 14.4 million tons for the first half of the year.
China’s gains offset output declines reported in all other global regions, which fell in the range of 3.4% to 6.4%.
Domestic Stainless Steel Market
Source: MetalMiner data from MetalMiner IndX(™)
Stainless 304 and 316 NAS surcharges stayed higher recently after rising during the past few months due to nickel price increases.
However, 316 surcharges dropped back slightly to $1.06/pound in November (compared to $1.08/pound during October). Surcharges for 304 held at $0.74/pound.
What This Means for Industrial Buyers
Nickel prices remained higher this month; therefore, industrial buying organizations need to stay alert for the right opportunity to purchase.
Buying organizations interested in tracking industrial metals prices with greater ease will want to request a demo of the all-new MetalMiner Insights platform.
Buying organizations seeking more insight into longer-term industrial metals price trends may want to read MetalMiner’s Annual Metal Buying Outlook.
The LME primary three-month nickel price dropped only mildly this month — following last month’s 6.8% correction — by 2.4% to $16,800/mt.
India’s primary nickel price dropped by 4.5% to $16.90/kilogram.
China’s primary nickel price increased by 1% to $19,356/mt. Other Chinese prices in the index generally increased in the range of 1.6% to 2.8%, with the exception of FeMo lumps, which dropped by 12.9% this month to $16,201/mt, and FeCr lumps, which increased 6.6% to $1,649/mt.
Indexed Korean prices increased 2.8% with stainless steel coil 430 CR 2B and 304 CR 2B at $1,539/mt and $2,480/mt, respectively.
The U.S. 316 and 304 Allegheny Ludlum stainless surcharges fell slightly — by 1.4% and 0.8%, respectively — to $1.10/pound and $0.77/pound.
China’s gross domestic product growth slowed again to 6.0% year over year in the third quarter, its weakest pace in almost three decades, Aluminium Insider reports. Citing a Reuters poll, the report notes industrial activity is expected to have shrunk for the sixth month in October, quoting a Reuters poll, suggesting hardly any relief from slowing global demand and the trade war.
The latest economic data from the E.U. and the U.S. also indicate slowing growth, with Germany flirting with a recession in the manufacturing sector. Although the aluminum market was estimated to be in deficit last year and this, a Reuters poll suggests it is likely to flip into a surplus of 304,000 metric tons next year — almost a 1 million ton turnaround from the 658,500-ton estimate for this year.
The article went on to say the consensus among major producers is that global aluminum demand growth will be flat (around zero) this year. Norsk Hydro predicts demand outside China will fall by 1-2%, meaning global demand is likely to fall by 0.5%. Alcoa took a similarly pessimistic view.
So why has the aluminum price currently taken a run-up to nearly $1,800 per metric ton on the back of, Reuters reports,supply fears?
It would seem investors are somewhat jittery and struggling to read the fundamentals.
Talk of Rio Tinto having to reduce output (or worse, shut its New Zealand smelter due to high power costs) and China’s second-place Chalco closing 200,000 tons of capacity in Shandong for the same reason seem to have stoked fears a number of smelter cutbacks could lead to a shortage.
Investors also view falling LME and SHFE inventories as a sign of a tightening market.
Aluminum stocks in SHFE warehouses dropped to their lowest level since March 2017 at 278,736 tons, while LME aluminum inventories dipped to their lowest since Sept. 30 at 956,200 tons, according to Reuters.
On the flip side, top consumer China is importing more and more remelt alloy ingots as part of its raw material product mix, which is finding its way through to increased exports of low-priced semi-finished products. China exported 4.37 million tons of mostly semi-aluminum products in the first nine months of the year – 2.8% more than in the previous year.
Primary production may be marginally down, but China is still supplying the world with semis, depressing activity at domestic extrusions and rolling mills in Japan, Europe and, by extension, the U.S.
Although the U.S. doesn’t import Chinese extrusions or billet, material supplied from elsewhere that has been displaced by Chinese metal does find its way in. Extruders are suffering, as illustrated by the low billet premiums prevailing in the U.S. right now.
While some polls have suggested aluminum prices could be back over $1,800 per ton next year if current conditions prevail, that looks unlikely.
More than just sentiment is being depressed by the trade war. With little chance of a resolution this side of the presidential election, manufacturing is unlikely to recover strongly enough to materially impact the supply-demand balance anytime soon.
In addition, as the LME is at pains to point out, the exchange’s network of warehouses operates in numerous locations around the world, each with distinct laws and regulations; new rules not carefully though out could contravene those differing sets of laws.
As frustrating as it can sometimes be to the trade, the LME’s cautious approach to changes designed to improve the experience for buyers, sellers, and stakeholders of the market — such as warehouse operators — is a methodology that in the long run mitigates the risk of “unintended consequences.”
The LME’s recent changes take just such a cautious approach.
After consultation far and wide, the LME released a Press Office statement Friday that outlined three main changes, plus additional commentary on what was proposed but the LME felt was too early to implement.
Broadly, the first change is intended to improve logistical optimization and is designed in part to guard against the structural queue model. The Queue-Based Rent Capping (QBRC) period has been extended from 50 to 80 days over a nine-month period and is intended to allow warehouse operators to compete more effectively for metal.
Queues have been probably the most sensitive issue the LME has had to address in the years since the financial crisis, so extending the permitted period took some consideration.
The exchange says it remains vigilant to such incentives not out-bidding or distorting physical market premiums and has instigated a reporting regime to monitor such risks. The LME intends to freeze rents and FOT load out charges until 2027-28 to mitigate the gulf between LME and non-LME warehouse rates.
On the topic of off-warrant stocks, the exchange is implementing a reporting regime intended to increase transparency and allow the market “to trade on the basis of a more holistic view of metal availability” – a move many of us welcome.
The LME intends to do this by requiring reporting for any metal in LME-registered sheds and/or under agreements in which the owner has a right to warrant metal in the future but is currently not on warrant.
Although the identity of the off-warrant metal owners will not be revealed, warehouse companies will gather and report the tonnage data periodically. There will still be some material that is not stored in exchange warehouses and where the owner is willing to pass the option of ever delivering such metal onto the exchange — but that is likely to be the exception.
Ultimately, the LME remains the market of last resort, as such is an option any investor would want to retain.
Do not, however, expect this data to be instantly available.
The LME caveats its plans by saying it will not release the data unless and until it is satisfied that the data is reliable and accurate – that could mean months, possibly a year, of monitoring.
Finally, of less interest to metal consumers is the seemingly arcane practice of so-called “evergreen rent deals,” whereby the owner retains an interest in warehouse rent on warrants they have sold on.
Going forward, this practice is only to be allowed on metal that is placed on warrant for the first time, not for warrants that are already registered and sold on. The intention is to incentivize metal coming onto the exchange but avoid a largely pointless ongoing cost that adds nothing to market efficiency.
As we said in the opener, these changes are an opening gambit and remain subject to monitoring and, if necessary, adjustment should any of the changes prove counterproductive or should additional steps be required.
Various sources are reporting both a slowing in demand growth and a fall in output for primary aluminum. So far this year, that combination has been led by a faster fall in output, pushing the market into a larger deficit position as the first half progressed.
Reuters reported the results of a poll showing a forecast for a global aluminum deficit of 550,000 metric tons this year — down from an earlier estimate of 868,240 tons — as demand growth has recently slowed.
Inventory levels support estimates of a deficit.
Primary inventories in warehouses tracked by the Shanghai Futures Exchange (ShFE) are hovering at their lowest since April 2017, according to Reuters. LME stockpiles have improved recently, but are still down 22% from the beginning of the year.
Not surprisingly, futures markets in China are showing more resilience to a generally depressed commodities sector. The ShFE’s most-traded aluminum contract is at its highest since May 29, hitting 14,285 yuan ($2,022.02) a ton last week before easing to close at 14,200 yuan a ton.
The LME, on the other hand, has continued to drift lower over the last two weeks after failing to hold above $1,800 a ton in July.
The disparity in outlook is down to the domestic production situation in China.
New smelter startups have been delayed as Beijing is taking a hard line with aluminum producers, forcing those keen to open up new capacity to close corresponding capacity at older, less efficient plants. Summer production has at best been flat and first-half production is marginally down from last year’s level.
Investors have been encouraged as Typhoon Lekima stormed over Shandong province, causing widespread flooding. Although there are no reports yet of aluminum outages as a result of the typhoon, the expectation is some smelters will suffer flooding and/or power failures, resulting in lost production.
Consumption, however, is softening, both in China and the rest of the world.
Weaker automotive production is a significant factor, as trade worries are causing just that — worries — rather than a significant downturn in non-automotive consumption so far. Expectations are for a pickup in Chinese domestic primary production this fall as the impact of the flooding wanes and those delayed startups come onstream.
Meanwhile, consumption is expected to soften further in Europe and Japan as both areas flirt with stagnation at best or, possibly, outright recession (being the only remaining mature markets open to China after tariffs essentially shut off the U.S. market).
The prospects this year for a rise in aluminum prices remain poor. However, if demand holds up and supply continues to be constrained, it could set the scene for a gradual rise next year, particularly if a resolution to the trade war is miraculously agreed.
This morning in metals news, a Turkish military pension fund has reportedly reached a tentative deal to buy the ailing British Steel, copper prices held flat Friday and the latest round of tariffs could impact China’s ability to prop up its economy.
LME three-month copper held at around $5,750 per ton, while the most-traded SHFE copper contract held at around $6,591 per ton, according to Reuters.
Tariffs and China
Earlier this month, President Donald Trump announced a new round of tariffs on Chinese products, aiming a 10% tariff on an additional $300 billion in Chinese goods (although the U.S. later announced the tariff would be delayed for some items in the product list).
With the new tariffs, nearly all of the U.S.’s imports of China would be subjected to tariffs.
According to a J.P. Morgan analyst in an interview with CNBC, the tariffs could impact Beijing’s ability to mitigate the damages via government measures. Bruce Kosman, chief economist and head of global economic research for J.P. Morgan, said China has deployed policies to mitigate the damages of the tariffs over the last year, but it is unclear how much more China will be able to do on that front.
This morning in metals news, India is likely to remain a net steel importer for at least the next two years, residents of Scunthorpe are concerned about the future of their town should British Steel close down and the copper price retreated to a one-week low.