Base metals prices have rallied in early 2Q2024. We have identified several potentially bearish items (and a few bullish items) related to raw material issues and speculative interests.
Metals Factors
Global Supply/Demand (Mostly Bearish, Surprise). Last quarter, the Aluminum Corporation of China (Chalco), the world's largest aluminum producer, reported a 39.6% increase in profits compared to a year ago, even though revenue dropped by 26%. Aluminum production jumped by 16% to 1.78 million mt, while operating costs fell by 31%. Operating costs should continue to fall while Chalco continues to build self-sufficiency in bauxite supplies. (Source: Bloomberg)
Due to higher aluminum prices elsewhere, Rusal could seek out new Asian buyers outside of China, according to Shanghai Metal Market (SMM). Even though this is possible, SMM still believes that China’s domestic aluminum prices will remain supported due to stimulus measures and improving demand. China is the top buyer of Russian aluminum, and similarly, nearly all of China’s primary aluminum imports come from Russia, according to Rusal and Chinese government data. (Source: Bloomberg, China Customs, Rusal)
USD (Equally Bearish/Bullish, Equally Priced In/Surprise). Despite all the US Federal Reserve’s recent interest rate hikes in 2023, the US Dollar has been relatively rangebound for the better part of a year. Rising interest rates have likely affected consumer behavior and, therefore, contributed to the recent economic slowdown. That said, we feel that other factors have had a greater impact on metals prices, as opposed to the USD.
Energy Costs (Bearish, Equally Priced In/Surprise. CME ULSD (diesel) prices have been flat in recent weeks. The forward curve remains backwardated, meaning that futures prices are lower than nearby. If you are a manufacturer that is also a large consumer of diesel, please reach out to AEGIS on how to hedge your diesel exposure.
CME natural gas prices have been relatively rangebound in late April and early May. As of this writing, the prompt month June ’24 contract now sits near $1.90/MMBtu. The market remains in a steep contango, with the January ’25 contract nearly $1.85/MMBtu higher than June ’24. Despite the contango, this could be a good time for consumers such as aluminum extruders to hedge future natural gas needs. We also note that natural gas prices have been extremely volatile in recent weeks. Please contact AEGIS for specific strategies that fit your operations.
Economic Slowdown/Global Interest Rates (Bearish, Mostly Surprise/Slightly Priced In). On May 1, the US Federal Reserve left interest rates unchanged at 5.25 to 5.50%. In a previous meeting, they stated that interest rate cuts likely wouldn’t occur until they were more confident that the inflation rate was nearing 2%. Jerome Powell also reiterated this in several speeches in late March and early April.
China’s slumping real estate sector remains a burden for metals prices. Earlier this year, Evergrande, once China’s largest real estate developer, filed for bankruptcy due to an insurmountable debt load of $300 billion. Some analysts believe that China’s construction season will be a boon for metals demand, but we remain skeptical, given the amount of overhang in China’s real estate market.
Tariffs/Sanctions (Bullish, Priced In). On Tuesday, April 23rd, Mexico announced new tariffs on imports of steel and aluminum for countries in which it does not have a free trade agreement. The repercussions of these new tariffs are yet to be known, but two well-known US-based aluminum industry organizations slammed the ruling, stating that the tariffs do not address how much aluminum is imported into Mexico, remelted, and then sent to the US. We are currently working on a blog post to detail this further and aim to get it published shortly. If you are concerned about the potential impact and/or would like to discuss hedging strategies, please reach out to AEGIS.
The US might put a 43.5% import tariff on certain South Korean aluminum extrusion products and companies, according to South Korean sources. The tariffs will range from 0% to 43.5%, depending on the company, the sources stated. It is currently unclear how this might impact aluminum imports from South Korea. Last year, the US imported a total of 115,000 mt of aluminum products from South Korea (including extruded products). This represented about 2% of the US’s total aluminum imports (across all products). (Sources: US Census Bureau, MT Newswires (via Bloomberg))
Indonesia’s Shandong Nanshan Aluminum Company plans to more than double its alumina production capacity to 4.5 million mt/year, up from 2 million mt/year. The company cites rising demand and ample local bauxite supplies for the expansion. They are building a 250,000 mt/year capacity aluminum smelter. The alumina plant is expected to cost $870 million and is pending approval from local authorities. (Source: Bloomberg)
Raw Materials (Bullish, Mostly Priced In). In the copper market, both prices and investment funds’ long position increased last week. Investment funds purchased about 4,950 net contracts, while prices rose by roughly 1%. This should be considered normal, positively-correlated action. Investment funds are now net long 55,660 contracts, reaching another new all-time high last week. Given that prices fell this week, it’s possible that investment funds have taken some money off the table. (Source: LME)
Continuing on price action, Chinese copper demand is now back into focus as global prices hover near $10,000/mt. Factory activity in China expanded for a second straight month, beating analyst expectations. However, fabricators are still struggling to pass along higher costs to end-users, which is suppressing demand. This could potentially cap global prices. (Source: Bloomberg)
Due to high global copper prices, China could export up to 100,000 mt in the coming weeks, according to anonymous sources interviewed by Reuters earlier this week. The sources also stated that this metal will likely be shipped to LME warehouses. Currently, only 1,150 mt, or about 1%, of LME On-Warrant copper inventories are from China. (Source: Reuters)
Speculative Positioning (Bullish, Surprise) Contrary to normal trading and price reaction, LME aluminum prices fell while spec traders increased their long position. As of last Friday, investment funds, generally speculators in metals markets, bought a net 9,200 contracts, bringing their total net long position to approximately 103,460 contracts. However, prices fell about 4% last week while funds were increasing their net long position. This is highly unusual, as investment fund positioning is normally positively correlated with price action. (Source: LME)
Meanwhile, in the copper market, both prices and investment funds’ long position increased. Investment funds purchased about 4,950 net contracts, while prices rose by roughly 1%. This should be considered normal, positively-correlated action. Investment funds are now net long 55,660 contracts, reaching another new all-time high last week. (Source: LME)
Geopolitical Risk (Bullish, Surprise). SSAB, one of Europe’s largest steel producers, has grown hesitant on demand due to the ongoing conflict in the Red Sea. “The geopolitical situation, which is nothing new maybe, still hampers the underlying demand a bit and the problems in the Suez Canal and so on,” CEO Martin Lindqvist stated on Tuesday. This apprehension about demand comes despite cooling inflation in most Western economies and the prospect of decreasing interest rates. (Source: Bloomberg)