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.
We all love conspiracy stories — who knew what and who was manipulating events behind the scenes?
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.
The Stainless Steel Monthly Metals Index (MMI) dropped again this month, by one point to 87.
The drop follows last month’s three-point decline to 88 on the heels of August’s five-year high of 91.
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.
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:
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.
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.
Forecasts call for modest growth in output, by around 2.5% per year annually through 2028, as reported by Reuters.
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
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.
Download your free Partial Sample Report: 2020 MetalMiner Annual Metals Outlook now.
Actual Stainless Steel Prices and Trends
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.
The aluminum price is a contrary thing, isn’t it?
For months, aluminum prices have been falling on the basis that demand is waning due to slowing global growth (particularly in top consumer China).
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.
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.
To an external viewer, the wheels can appear to grind slowly at the world’s oldest metal exchange.
But the years have taught the London Metal Exchange about the danger of hasty rule changes — often made for the best of intentions, such changes can lead to unexpected consequences.
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.
Turkish Military Pension Fund to Buy British Steel
The British Steel saga could be moving toward a positive resolution.
The steelmaker, the U.K.’s second-largest, went into liquidation in May after it was unable to secure a government loan. Afterward, a bidding process began for the firm.
In recent weeks, a Turkish military pension fund emerged as the favorite to buy the troubled steelmaker. On Friday, the BBC reported the Turkish fund has reached a tentative deal to buy British Steel.
According to the report, the Turkish Armed Forces Assistance Fund said it plans to take over British Steel by the end of the year.
Copper prices traded flat to close the week, Reuters reported.
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.
India to Remain Net Steel Importer
As steel imports continue to flow into the country, India is likely to remain a net steel importer over the next two years, Bloomberg reported citing Fitch Ratings Ltd.’s local unit.
India’s annual steel consumption is nearing 100 million tons, according to the report.
Worrying About the Future
A recent bid deadline came and went for the liquidated British Steel, based in Scunthorpe, England.
Media reports indicate there have been at least nine interested buyers, but it remains unclear if a buyer would be willing to take on the entirety of the business, as opposed to individual parts.
With the plant’s future in limbo, the BBC reported residents of Scunthorpe are concerned about a potential shuttering of the plant and the impact it would have on the town.
“If the worst comes to worst, and the steelworks does actually shut, it will be devastating for so many people here,” one resident is quoted as saying.
“People will probably have to move away.”
On the heels of the weekend’s G20 Summit in Japan, the copper price fell to a one-week low Tuesday, Reuters reported.
Copper prices soared to a six-week high on Monday. The LME copper price traded down 0.5% Tuesday, according to the report, down to $5,925 per ton, on weak global manufacturing data.
Aluminum base prices on the London Metal Exchange (LME) have been sliding for the last couple of months, suggesting we have a market in surplus.
So when the United States removed tariffs on imported steel and aluminum from Canada and Mexico last month, you would have expected the resulting flood of lower-priced aluminum would have driven down the Midwest Premium.
No such luck.
Despite a minor blip, it has remained stubbornly elevated at over USD $400 per ton, raising howls of protest from consumers (particularly in the beverage can market).
But before we accuse primary mills of gouging the market, let’s consider some points made by Andy Home in a Reuters article this week.
First, some context supporting the consumers’ position. Canada accounted for some 51% of aluminum supply to the U.S. market in 2018, with Australia, Argentina (who were exempted from the start) and now Mexico making up another 8%, so that nearly 60% of supply is now duty-exempt.
Yet prices have not really shifted despite jumping from $0.10/lb before the tariffs were announced to over $0.22/lb now – well above the 10% (about $0.08-$0.09/lb) that could reasonably be attributed to the tariff.
That raises the question as to what is really going on: if elevated Midwest Premiums are not really reflecting the 232 10% import tariff as many have maintained, then why do they remain elevated? Does their persistence after the tariff removal mean they may be a long-term feature of the market?
Technically the Midwest Premium has generally been explained as the cost of delivery to a U.S. consumer, largely reflecting haulage costs.
But while it is a reflection of that, it is also much more, Home suggests.
The CME contract traded volumes equivalent to almost 2.5 million tons last year, not just from trade hedging but as a market in its own right. The U.S. market remains incredibly tight. Prices aside, the loss of some 350,000 tons of supply from the Becancour smelter in Canada due to a lockout has not even begun to be replaced by domestic U.S. restarts amounting to only some 90,000 tons.
The market has continued to grow, but supply is constrained – surely that should be reflected in the LME price, you may ask?
Yes, in a fully functioning market it should be. The U.S. isn’t a market isolated from the rest of the world — so what are premiums doing elsewhere?
Rotterdam P1020 duty-unpaid premiums rose to about U.S. $100 per metric ton this month, up from $90-$95 per metric ton late last month. However, duty-paid premiums in less-traded and lower-volume Mediterranean markets, like Spain, eased slightly to U.S. $350-$360 per metric ton from a shade higher last month (not far off Midwest Premium levels, according to AluminiumInsider).
Premiums in South America are even higher, reaching U.S. $500 per ton in Brazil. The premiums are not reflecting the scarcity of metal, per se, so much as the scarcity of metal in a particular location.
But if some justification for the premium can be made, what about the elevated prices being paid by consumers despite a declining LME? Home has some thoughts for us on that, pointing to the revenue earned by suppliers in this elevated market, noting the U.S. government collected only around $50 million in tariffs.
Some of the difference, an estimated $27 million, went to U.S. primary aluminum smelters. The bigger part, $173 million, went to U.S. rolling mills. The latter, according to the article, have been pricing their can stock to include the 10% tariff, even though primary metal only accounts for around 30% of the input (the rest is scrap).
The beverage market is far from alone in this. For those consumers who do not break down the raw material, delivery premium and value-add elements of their pricing, mills have managed to push through price increases in excess of 10% on the back of less than 10% cost increases.
Consumers, then, do have grounds for discontent.
What they do about it in the face of a still tight market for many grades is tough, but breaking out base metal, premium and gaining as much transparency as possible into the value-add is a big first step. It provides data for negotiation and a structure for analyzing price changes with greater power in the hands of the buyer.
In a difficult market, consumers need all the tools they can lay their hands on.
The May Aluminum Monthly Metals Index (MMI) held flat at 88 for the third month running, with gains in Chinese aluminum prices negated by weak LME prices.
LME aluminum prices trended downward throughout April, down to recent January 2019 lows. However, prices seemed to find support again around $1,800/mt in the early days of May.
The price basically retraced back to January lows, losing all of the gains made during 2019.
SHFE aluminum prices continued to increase, with a higher per ton price of around $2,100/mt.
Based on the most recent production figures from the International Aluminum Institute, although March production levels in China increased by 10% over February 2019, Chinese production levels when compared with March 2018 only increased by 1%. During Q1 in total, Chinese production registered at 8.9 million mt, versus 8.8 million mt the year prior — a 1.6% increase over 2018.
Supply Concerns Fade, but Deficit Anticipated in 2019
With global demand for aluminum outpacing supply, the LME price decline could be a temporary weakness.
Aluminum has been caught up in the general negative pricing momentum industrial metals saw during the past few weeks, as the dollar showed strength. As the dollar strengthens, metal prices tend to weaken. However, if demand conditions deteriorate, the price declines could stick, or the price could continue to move sideways on weakened demand.
According to Alcoa’s most recent quarterly report, a global aluminum deficit of aluminum in the range of 1.5 million mt to 1.9 million mt is estimated for 2019. However, the company estimate was revised down from the range of 1.7 million mt to 2.1 million mt given in the company’s prior quarterly report. This indicates the company anticipates some moderation of global growth, with its estimates revised down to the 2-3% range from 3-4%, stating lower demand growth in China, particularly lower transportation and electrical sector demand.
Midwest Aluminum Premium
The U.S. Midwest Premium continued to hold at the historic high of $0.19/pound during April.
What This Means for Industrial Buyers
LME aluminum prices weakened along with other base metals prices last month, showing downward momentum; prices remain within range of a sideways trend. Prices could hold, then continue to rise further once more or move lower from here depending on overall supply and demand factors at large. It’s also possible the sideways pricing band will continue to hold on weakened demand. Even in a sideways market, it’s important to watch the market carefully for buying opportunities in order to buy on dips.
For more specific pricing guidance related to aluminum and aluminum products, buying organizations may want to request a free trial now to our Monthly Metal Buying Outlook.
Actual Metal Prices and Trends
Chinese aluminum prices led the index this month, with increases in the range of 2.7% to 2.8%.
The LME primary 3-month price declined by 5% (the biggest decrease in the aluminum basket).
European and Korean prices also declined, but more mildly (in the range of around 1%).