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). LME Aluminum prices briefly rallied almost 9% on Monday morning (April 15, UK time) after the US, UK, and LME all banned the import or delivery of newly produced Russian aluminum. This kneejerk quickly cooled, and aluminum finished up approximately 3% on Monday afternoon. Meanwhile, market analysts are mixed about the wider implications these new rulings will have. In an emailed note to Bloomberg, Morgan Stanley stated, “While the new restrictions do not stop the trade of Russian metal, we could see some temporary upside support for prices of copper, aluminium and nickel…. if the ban on delivery into LME and CME warehouses makes traders and users less willing to handle Russian material and disrupts broader trade flows.” Meanwhile, Citigroup proclaimed, “We think the net impact is positive for LME-traded primary aluminum, copper and nickel flat prices as it shifts the prior discount for new Russian units of these metals off-exchange and creates vulnerability to near-dated spread tightness through future inventory cancellations. However, the measures are not meaningfully targeting physical trade of units outside the LME warehouse system, which should moderate the scale of the price impact. We think the measures are intended to (and will) drive deeper discounts for new Russian metal production versus global prices by constraining options for their sale and finance." (Source: Bloomberg)
In response to the US, UK, and LME import and delivery ban on Russian-produced aluminum, Rusal proclaimed these actions would not impact sales. “The announced actions have no impact on Rusal's ability to supply since Rusal's global logistic delivery solutions, access to banking system, overall production and quality systems are not affected. The U.S. determination does not impose any new prohibitions or requirements relating to the processing, clearing or sending of payments by any intermediary banks." Rusal is the largest primary aluminum producer outside of China. The company is also the largest foreign supplier to the Chinese market. (Sources: Reuters, China Customs)
Global daily aluminum production surged again last month, led by China, Asia (ex-China), and North America, according to the International Aluminum Institute. Chinese production in March averaged 115,800 mt/day, up from 110,500 mt/day last March. Meanwhile, production in Asia (ex-China) increased from 12,800 mt/day to 13,200 mt/day, and North American production increased from 10,500 mt/day to 11,000 mt/day. Total global production averaged 195,900 mt/day, up 3.5% compared to last March. Chinese production is expected to jump again this month, according to estimates from Shanghai Metal Market. (Sources: Bloomberg, Shanghai Metal Market)
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 bounced in late March and early April. As of this writing, the prompt month May ’24 contract now sits near $1.70/MMBtu, roughly 15 cents/MMBtu off the recent highs. The market remains in a steep contango, with the January ’25 contract nearly $1.8/MMBtu higher than May ’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 March 20, the US Federal Reserve left interest rates unchanged at 5.25 to 5.50%. They also stated that interest rates could fall by 0.75% this year, meaning that there could be two to three interest rate cuts. Inflation remains “sticky” and higher than the Fed’s target rate of 2%, though. 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, 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.
Raw Materials (Bullish, Mostly Priced In). Chinese refined copper production was nearly an all-time high last month, despite reports that these smelters have struggled to source raw materials. Last month, daily smelter production averaged 37,000 mt, nearing the all-time high of 38,000 mt/day set last November. Total production in March was 1.147 million mt, up 7.9% compared to a year ago. Similarly, year-to-date production is up 10% compared to last year. According to recent reports, Chinese copper smelters have experienced problems with sourcing raw copper due to mining productions in Central and South America. (Source: Bloomberg)
Chinese buyers are stepping back from purchases, several domestic market participants have stated. This is particularly true for fabricators, who are price-sensitive, especially in times of uncertain demand. At an industry conference earlier this week, Gu Yan, director of copper at Citic Metal Co., stated, “Demand from fabricators is very weak after the recent rally. There is only a bit of demand from the renewable-energy sector, not much from any other markets. Fabricators are all waiting for a price correction to get a breather.” At the same conference, Wang Wei of Shanghai Wooray Metals Group Co. echoed similar comments, proclaiming, “Fabricators have struggled to pass on higher costs to their customers, forcing them to rein in purchases since March. (Source: Bloomberg)
Speculative Positioning (Equally Bullish/Bearish, Priced-In) Investment funds, which are mainly speculators in metals markets, continue to increase their long position in LME aluminum. According to the LME’s most recent COT report, out Tuesday, these funds are net long approximately 93,250 contracts, having purchased about 17,500 contracts (net) last week alone. Since the beginning of March, these funds have purchased over 115,000 (net) contracts, flipping from a modest short position to their largest long position in nearly two years.
Continuing on fund positioning, these funds have now their largest-ever long in LME Copper. As of last Friday, these funds are net long about 50,700 contracts, eclipsing the prior record from early 2021 by about 2,800 contracts. Fund buying might slow or stop in the coming days or weeks, especially since prices were unable to break the psychological resistance level of $10,000/mt. Also, end-user demand in top-consumer appears to be stalling and could give investors a reason to pause. (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)