LME

Given the state of the world, one would expect base metal prices to show every sign of a resurgence. Certainly, analysts have been bullish about a supply squeeze for months because sky-high natural gas prices forced record electricity costs across Europe. Just this week, the FT reported that Aluminum and Zinc smelters continue to close all over the continent with the latest casualty being the 175,000-ton Slovalco aluminum smelter in Slovakia.

Source: Adobe Stock/Bonzodog.

According to Norsk Hydro company representatives, who are the majority owners, Slovalco will shut down primary production by the end of September. Meanwhile, Norsk Hydro also faces a strike at its Sunndal aluminum smelter in Norway, Europe’s largest such facility. In this case, the organization reports that the strike will idle about 20% of capacity for four weeks starting Monday. All of this comes on the back of zinc smelter closures in the Netherlands and Spain. To top it all off, LME inventory levels are currently at near record lows.

Why are investors so sanguine about prices? After all, there seems no end in sight to high power costs. If anything, they are set to get worse as Europe faces higher winter fuel demand. In fact, governments are already drawing up plans for rationing and enforced closures for high energy users so that they can keep their populations’ homes warm and lights.

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The Answer to Base Metal Prices is Most Likely China

Well, here’s one possible answer. Perhaps, after all the volatility these last twelve months, the markets are now laser-focused on the traditional driver of global metals demand and prices: China.

Indeed, China’s stuttering construction sector proved a huge dampener on the world’s economic expectations. On top of that, COVID restrictions continue to limit activity in the services sector, which, in turn, causes myriad problems for manufacturing. There’s also the heat wave in eastern China, which sent power demand soaring and resulted in limited rationing. Among the most affected? The area’s aluminum, zinc, and copper smelters.

Copper Fighting Back

The only sector showing any real resilience copper imports. 12 months of well-below-par imports pushing stocks to low levels helped bring this on. This also came in response to Beijing’s plans to considerably expand power transmission. So far, the government has announced plans for six major new lines and even more medium-capacity transmission lines over the next year. Normally, aluminum would be the biggest beneficiary of major power transmission projects like this. However, so far, the index has barely moved in response to the announcements.

For now, at least, recessionary fears and a slowing Chinese economy are the narratives of the day. However, even in a recession, industries will continue to consume metal. This simple fact, combined with woefully low global inventory levels and shuttering production capacity, feels like watching a train crash in slow motion. Let’s hope both markets and consumers have time to react as we get closer and closer to impact.

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MetalMiner follows the LME (London Metal Exchange) very closely, as it remains the largest commodities exchange for base metal options and futures. Recently, we mentioned how the LME had quietly withdrawn its precious metals contracts due to low liquidity. However, that’s only part of the story when it comes to dwindling LME stock.

LME Stock

Both LME Stock and Prices are in Freefall

Last week, Reuters published an article detailing how LME warehouses held only 696,109 tons of registered metal at the close of June. It’s the lowest amount of available LME stock this century, and it should be pushing prices into bullish territory. However, ongoing fears of a looming recession are having the opposite effect. In total, the LME index has slumped 31% from its April high point.

According to experts, LME inventories were cut in half over the first two quarters of the year. In fact, that June report represents a year-over-year drop of 1.67 million tons. Depending on who you as, it’s unlikely stocks or prices have hit bottom just yet. As of the time of the report, over 300,000 tons of the aforementioned estimate was still waiting to be offloaded. In terms of readily available supply, this means the LME sits at just around 390,000

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A Rare Rift Between Price and Supply 

It doesn’t take an economics degree to see what’s happening with prices and inventories is rare. One of the first things traders learn is that when stocks of a commodity decline, the price should rise. With the LME stock, we have the opposite happening. As mentioned, recession fears are a big part of this. However, it would be nearly impossible to list out all the factors contributing to this “perfect storm.”

What does remain to be seen is whether or not this rare rift between price and supply will correct itself in the coming weeks. Back in June, Reuters reported that zinc stocks had all but disappeared from LME warehouses. Simultaneously, the price fell to a brand new low. As of this writing, they are hovering even lower – around $2,950.

One place we can look for an explanation is the supply chain, which has remained tight throughout the pandemic. In terms of lead, zinc, and tin, you can trace very significant supply disruptions for each metal. For instance, zinc smelters in Europe are shutting down due to energy costs. A major lead plant in Germany has yet to recover from a 2021 flood. Tin, on the other hand, has been in short supply for months due to coronavirus lockdowns.

Know what to do when the market shifts. Related article: The Art of Timing Your Buy

Commodities in General Are Under the Microscope

Markets around the globe have been taking hits from all directions since the pandemic first appeared on the scene. Now, more than two years later, we’ve seen unprecedented inflation, spikes in grain and energy prices, and countless disruptions in supply and demand. Just recently, the LME suspended nickel trading after a spike in volatility, prompting at least two lawsuits.

The chaos has put commodities of all kinds under an international microscope. So far, it seems many regulators don’t like what they see. While metal and oil futures boast a lot of tracking and transparency, the same can’t be said of other important products. This has led some organizations to seek new rules that would give them more leeway to predict market vulnerabilities.

Risk Factor

So far, the Financial Stability Board, based out of Switzerland, has started scrutinizing commodities markets with renewed gusto. The same goes for The Bank of England, which is seeking more transparency on commodities trading in general. However, the investigations and any regulations stemming from them will take years.

In the meantime, the bulk of the pressure is on suppliers to fill those LME warehouses before the year’s end.

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The UK government has added Vladimir Potanin, Norilsk Nickel’s president and chairman of the management board, to its list of sanctioned individuals. The LME nickel price remains in question. A June 29 update notification from HM Treasury’s Office of Financial Sanctions Implementation (OFSI) noted Potanin’s addition. The stated reason was that he would benefit from or support the Russian government by owning or controlling Rosbank.

UK Sanctions

Sanctions are being placed on Vladimir Potanin by the UK government

“Rosbank is carrying on business in the Russian financial services sector, which is a sector of strategic significance to the Government of Russia,” OFSI said in its update. Potanin, the board chairman for Moscow-based conglomerate Interros,  holds a 35.9% stake in Norilsk Nickel. That holding group acquired Rosbank from French investment bank Société Générale back in April.

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The LME Reacts to Sanction News and Nickel Price

The market quickly voiced concerns over possible supply issues. According to reports, news of the sanctions caused nickel prices on the London Metal Exchange to jump by 6%. The base metal’s official three-month closing price was $23,158 per metric ton on June 28. According to data from the bourse, this represents a decline of 10.8% from June 21, when prices were $25,949.

The sanctions are part of the “Russian Regulations”. This information falls under the Sanctions and Money Laundering Act of 2018. According to the OFSI documents, these stipulate freezing funds and economic resources belonging to entities “involved in destabilizing Ukraine. It undermines or threatens the territorial integrity, sovereignty, or independence of Ukraine. It’s about obtaining a benefit from or supporting the Government of Russia.”

Nickel Price

2022, Adobe Stock

The asset freeze also prevents any UK citizen or business from dealing with any funds owned, held, or controlled by the named individual. “It also prevents funds or economic resources being provided to or for the benefit of the designated person,” a government statement said. Potanin will also not be able to enter the United Kingdom or remain in the country

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A Long List of Bans and Sanctions

Norilsk, one of the world’s largest single nickel producers, accounts for approximately 7% of the global supply. Of course, Nickel’s primary application is the production of austenitic stainless steel. However, the metal’s application also extends to batteries, including those designed for electric vehicles. Platinum and palladium are also sourced heavily from Norilsk’s production. Back in May, the UK government imposed a 35% duty on all imports of the rare metals sourced from Russia or Belarus.

That same month, the UK froze the assets of London-headquartered Evraz. As a major steel manufacturer, Evraz has steelmaking and mining assets in Russia. The Financial Conduct Authority had already suspended the group’s shares on the London Stock Exchange two months earlier. This was largely due to the government’s addition of Roman Abramovich to its list of sanctioned individuals.

Nickel Mining

In March, steel and iron imports from Russia and Belarus were subjected to a 35% import duty. The move was the result of denying the two countries “Most Favored Nation” status for hundreds of their exports.

It Remains Unclear How Much Impact the Move Will Have

The LME has still not banned Russian Nickel. It’s just that the stocks from Russia are lower due to concerns over supply and logistics. So, while things might seem tight in Europe for now, there are ample opportunities to source Nickel from other places and producers.

Indonesia, for instance, has been ramping up its nickel production exponentially. This will effect its nickel price. In fact, estimates put the country’s primary production forecast for 2022 at 1.3 million metric tonnes. That’s a 52% increase on the year. Currently, primary nickel demand within Europe is forecasted at 310,000 metric tonnes for the year. This is a significant increase from 2021, when demand was 300,000. Fortunately, the LME does not require high-quality nickel for all of the nickel it pushes through.

Despite the sanctions, Norilsk Nickel will likely turn its attention towards China as a primary end-user. If demand holds up in that market, the company will not get too broken up about Potanin’s inclusion on the U.K.’s list.

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The MetalMiner team has broken down the significant fluctuations in the LME nickel contract this month.

But now that a few weeks have passed since the LME first suspended trading, it’s time to take a look at some other interesting trends at play on the LME and elsewhere.

In this question-and-answer session, MetalMiner’s Stuart Burns will weigh in on volume dips on the LME, the fallout from this month’s decisions to suspend trading of the nickel contract and much more.

As always, the MetalMiner team will continue to break down these issues and more in the MetalMiner weekly newsletter.

LME vs. SHFE

LME graphic

dizain/Adobe Stock

Three LME contracts — nickel, aluminum and copper — have all lost liquidity/volume of late. Meanwhile, the SHFE has seen increases for nickel and aluminum. COMEX seems to be the winner on copper. Has the nickel debacle hurt the LME’s credibility such that the market has moved to alternative exchanges and does this pose an existential threat to the LME?

The threat to the LME’s dominance in nickel was a point I raised last week in a post, and I agree is a valid one.

The SHFE continued to trade while the LME was closed (a point not lost on the market needing to hedge exposure). While it didn’t suffer the volatility of the LME — the shorts were nearly all on the LME, not the SHFE — the significance of having an exchange still trading while the LME was “away” can only have encouraged investors and trade to “dual source” and consider both exchanges in the future.

How this will look in 12-24 months remains to be seen. However, the situation is clearly positive for the SHFE and negative for the LME. Of that there is no doubt.

As we continue to monitor volumes and prices on the respective exchanges, the MetalMiner Insights platform features metal price data for both LME and SHFE nickel.  

The dollar’s place

Further to that point, if volume and market liquidity move to the SHFE, does that pose a risk to the value of the dollar as the world’s reserve currency. Could this hasten the toppling over of the dollar as the world’s reserve currency? 

There would only be a threat to the dollar if there were a viable alternative. Currently, there isn’t one.

The euro and yen are nowhere near as widely used. Furthermore, the RMB is a fraction of dollar trades.

Does it bring the date forward from 2075 to 2050? Maybe it helps contribute to an earlier loss of reserve status for the dollar. However, oil and most agriculturals remain in dollars and will do so for the vast majority of trades.

Saudi Arabia’s possible acceptance of RMB for its oil sales to China will result in a bilateral trade flow as the only place they can use them is buying stuff from China. That has its limitations when your whole economy relies on Western technology and equipment.

In addition to analysis and forecasting for 10 metal groups, the MetalMiner Monthly Metal Outlook (MMO) also features analysis of other factors relevant to metals markets, including currencies, oil prices, policy developments and much more.

What’s next for the LME?

Nickel liquidity/volume has nosedived at the LME. Will this be permanent? Temporary? What must the LME do to right its ship? Is there a real risk of some of its most lucrative contracts moving to other exchanges?

The trade still needs to hedge and they will come back to the LME.

Investors or speculators may be burned. Ultimately, they will come back.

Following on from the first question above, though, they may be tempted to spread bets across the SHFE. The two markets are driven by separate dynamics, though, so they are not simply geographically displaced equivalents.

If your investment strategy is driven by a perception of European supply and demand, it may not play out the same on the SHFE. The SHFE is driven by Asian supply and demand — specifically, Chinese supply and demand.

You must wonder what would have happened if the LME had left the nickel market alone — after nickel prices embarked on a meteoric rise March 7 — and allowed the short covering price spike to work out.

Yes, the shorts would have been badly burned. That would have included not just Tsingshan Holding Group tycoon “Big Shot” Xiang Guangda’s reckless bets against the market, but a host of other parties similarly ill-positioned.

But isn’t that what happens if you are the wrong side of a trade? That’s the risk you take.

Amid volatility in nickel prices (and other metals), keep track of metal prices in the MetalMiner Insights platform. 

LME nickel vs. SHFE nickel

nickel prices

leszekglasner/Adobe Stock

Anyway, for better or worse, the LME pulled the plug at 8:15 a.m. London time the following day, canceling some $3.9 billion of trades. Nickel trading — on the LME, at least — ceased for the next 11 days.

After a shaky start last week, LME nickel prices have gradually come into alignment with the SHFE price – which closed only for a day – as the arbitragers have sold LME and bought SHFE.

The market has remained volatile, though.

Read more

Well, if you thought the London Metal Exchange’s unprecedented suspension of trading last week took the steam out of the nickel market and nickel prices, and that the world would revert to orderly conduct Wednesday when the LME resumed trading, you would have been wrong.

Nickel price chaos

nickel price

leszekglasner/Adobe Stock

The LME had set trading limits of 5% price movement above and below the last close as a signal to the market of their expectations. That is somewhat akin to the Fed setting expectations of future interest rates in the hope the market would align with that expectation.

But the exchange halted trading almost immediately after it opened Wednesday. Nickel prices crashed below the 5% limit and the LME suspended trading again. The market took the news that major short position holder Tsingshan Holding Group would no longer need to buy metal immediately to cover its positions, after reaching an agreement earlier this week with its banks to avoid margin calls and wind down its positions.

“As the market opened (the electronic system) discovered an opening price of $45,590,” the LME said in a trading update. “Unfortunately, due to a systems error, LMEselect then allowed a small number of trades to be executed below this lower daily price limit.”

The exchange said all trades executed on the LMEselect system at the lower daily limit would remain. Those below, however, would be canceled.

LME nickel price chart

Source: MetalMiner Insights

Long position holders cry foul

Last week’s suspension was accompanied, rightly, by howls of protest from those long position holders who had stood to make substantial profits, only to have them whisked off their desk by the LME’s suspension.

Read more

The headline poses a rhetorical question — we can all see the rundown in LME inventory this year.

However, the question is intended to raise two issues.

London Metal Exchange

dizain/Adobe Stock

First, while in many cases analysts will point to falling inventory levels as a reason for rising prices, the current ultra-low levels of LME stocks support the point we have always made at MetalMiner: there is little direct correlation between inventory and prices.

Indirect? Yes, but falling inventory does not automatically suggest prices will rise. Today’s base metal prices are nearly all off peaks seen in Q3 despite even lower inventory levels on the LME.

Second, point covered by an interesting article in Reuters this week explores why inventory levels are so low and what steps, if any, the LME can do about it.

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Demand surges put strain on supply chains

The “why,” is as so often the case with base metals, is in large part due to China.

But while resurgent demand in the world’s largest consumer is certainly a part of the problem, demand elsewhere is also significant. A global rush to restock supply chains has put base metal supply under extreme duress. Overlaying that has been a highly constrained and chaotic global shipping market. Sky-high rates are not just delaying shipments but dissuading the normal flow of metal that would restock or resupply regions in response to arbitrage price differences.

Finally, in the second half of this year we have seen considerable disruption in China due to power constraints. Some of that has been self-induced by Beijing. However, some has come as a result of coal supply following flooding in some regions and earlier hydroelectric power supply rationing due to drought.

Read more

London Metal Exchange CEO Matthew Chamberlain has expressed doubt over sourcing aluminum from exclusively low-carbon sources in the short term.

“There have been calls for us to exclude high-carbon production, but we don’t think that’s the right thing to do because there simply would not be enough aluminum on the market,” Chamberlain said on Oct. 11 in an interview with Bloomberg Markets and Finance.

Prices on the LME would also be significantly higher than they are now, he warned.

Do you know the five best practices of sourcing metals, including aluminum?

LME aluminum price on the rise

aluminum price

Grispb/Adobe Stock

The LME’s three-month bid price for the base metal reached $3,019 per metric ton Oct. 11. That is up by one-third from $2,254 on April 12, data from the bourse showed.

Higher demand, plus production cuts in China, have helped to sharply boost benchmark aluminum prices over the past six months. The world has also faced supply chain disruptions as the global economy restarts after the COVID-19 pandemic.

Chamberlain could not say how much of a premium end-users would potentially pay on the base metal with a low-carbon footprint.

The LME’s announcement on the same day of its plans to collaborate with Düsseldorf-based spot trading platform Metalshub would help buyers to acquire the greener aluminum as well as to determine potential premiums, he said.

“What we foresee is a world where you have the LME to deal with high-level hedging … but there is a more digital way where you can then go and source specific parcels of metal with specific sustainability characteristics like low carbon,” Chamberlain stated.

Future of aluminum

Responding to a question over whether or not the exchange would potentially no longer accept “dirty” aluminum, Chamberlain stated that he did not rule it out in five to 10 years, as views on carbon vary.

“People have different views on the carbon footprint of our product, and that’s why we believe that disclosure and user choice is the right way to deal with it,” Chamberlain said.

“I certainly think the world could end up there,” where only lower-carbon is available, Chamberlain noted.

The bourse already does not accept metal that has exploited child labor or that has supported conflict financing as the world has decided that those are negative things, he added.

Chamberlain made the statements at the start of the LME Week, which is taking place in 2021 from Oct. 11-15. The event is an annual get-together for metal industry participants along the entire supply chain. The week includes seminars on trends and outlooks, along with networking sessions and the LME Dinner.

Events for the week in 2021 are more curtailed due to ongoing concerns over the COVID-19 global pandemic.

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After a barnstorming first quarter, the copper price appears to be bucking the wider bull market narrative by trading sideways in the second quarter.

Yet there remains a strange disconnect between COMEX and the North American market and the LME and rest of the world.

Receive the latest short-term and long-term outlook for the full range of industrial metals (base and ferrous) at the annual MetalMiner Forecasting Workshop on Aug. 25

COMEX-LME copper arbitrage

copper stored in warehouse

Sitthichai/Adobe Stock

There is a sizeable arbitrage window between COMEX and the LME copper price, prices that would normally move in relative harmony.

The underlying cause, Reuters suggests, is imbalanced inventory.

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.

Read more

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.

Each month, MetalMiner hosts a webinar on a specific metals topic. Explore the upcoming webinars and sign up for each on the MetalMiner Events page.

Futures exchanges launch lithium hydroxide contracts

London Metal Exchange

dizain/Adobe Stock

Both exchanges have launched identical lithium hydroxide cash settled contracts based on the Fastmarkets prices for China, Japan and South Korea – the key battery-producing regions.

So far, volumes are light. But with lithium hydroxide prices up some 86% this year, the market is arguably crying out for a hedging mechanism.

Initially, miners were said to be reluctant to support such a product, preferring long-term mine-to-consumer contracts. The same is the case for aluminum.

Eventually, the industry came round.

Read more

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