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). Metals prices jumped on Monday (May 13) on new stimulus efforts by the Chinese government. On early Monday, the country’s Finance Ministry stated it will sell another round of bonds that will be earmarked for infrastructure spending. Two major cities stated that they are removing restrictions on residential purchases. More major metro areas are expected to implement similar measures. This boost in stimulus comes after an unexpected contraction in credit issuance in April. (Source: Bloomberg)
On Tuesday morning (May 14), the LME saw its second large arrival of aluminum in less than a week. The most recent influx of 131,500 mt occurred in Malaysian warehouses, which are a known repository of Indian aluminum. Last week, LME on-warrant stockpiles, meaning the metal is available to trade, surged by 560,875 mt, the largest one-day jump in history, with approximately 75% going into Malaysian warehouses. AEGIS contacts tell us that Friday’s total inflow was likely of both Indian and Russian-origin aluminum. After the US and UK banned their citizens from trading Russian metals and the LME subsequently banned such deliveries, several large trading houses were briefly able to take advantage of a loophole in the LME’s new rules. The inflows of Indian aluminum could stem from LME’s recently announced proposal that would require aluminum producers to submit carbon data beginning in early 2025. (Sources: Bloomberg, LME)
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 to lower 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 slightly in early May. As of this writing, the prompt month June ’24 contract now sits near $2.40/MMBtu, about $0.50/MMBtu off the recent lows. The market remains in a steep contango, with the January ’25 contract nearly $1.40/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))
Earlier this week, the Biden administration implemented a 100% tariff on imports of Chinese EVs. This is unlikely to meaningfully impact imports, however, as the US only imported about 2,200 Chinese EVs last year. If you would like to discuss this further or have exposure to battery metal markets such as cobalt or lithium hydroxide, please reach out to AEGIS. (Source: Reuters)
Raw Materials (Bullish, Mostly Priced In). The LME Copper Cash - 3M spread, a key gauge of spot demand, continues to trade near record lows. Last week Wednesday, the cash contract closed at $136/mt discount to the benchmark contract 3M, the lowest level this spread has traded since at least 1994. The spread has recovered slightly since then, but not enough to suggest that spot demand has meaningfully improved. This ultimately implies that spot demand has slumped while prices have surged. (Source: LME)
Speculative Positioning (Bullish, Surprise) It appears that investment funds could finally be taking profits on their long position in LME aluminum. As of last Friday, investment funds, generally speculators in metals markets, were net long approximately 99,125 contracts, down from the nearly 103,000 net long position they had the Friday prior. This was the first time this long position had decreased since early March. The actions of investment funds are usually positively correlated with price action, which is likely why prices fell 1% last week. (Source: LME)
Unlike aluminum, investment funds continue to buy LME Copper. Last week, investment funds added another 4,200 (net) contracts, bringing their total position to an astounding 63,590 net long contracts. This is slightly more than the 3,700 (net) contracts they added during the week ending May 3. LME copper prices rallied about 1% last week, likely due to the continued buying activity by investment funds. (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)