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). Late Friday afternoon (US time), the US & UK governments announced they were banning imports of all newly produced Russian metals, effectively immediately. At essentially the same time, the LME declared that Russian aluminum and other metals produced after April 13, 2024, cannot be used for deliveries into LME warehouses. Despite the ban on newly produced aluminum, the LME is bracing itself for a possible influx of “old” Russian aluminum, its CEO warned and acknowledged on Saturday morning. This shouldn’t dramatically affect US imports, as the US has imported only a negligible amount of Russian aluminum in 2023 and 2024. For more information on these bans, or if you want a copy of the governmental or LME press releases, please contact AEGIS. (Sources: LME, Bloomberg)
LME Aluminum prices briefly rallied almost 9% on Monday morning (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)
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). Recently, the US Commerce Department issued preliminary tariffs on aluminum extrusion imports from Mexico, China, Turkey, and Indonesia. The MWP market reacted little because the final tariff rates won’t be known until late July 2024 due to the US Commerce Department’s ongoing investigation. Also, it is currently unclear when these tariffs will go into effect. (Sources: Mining.com, Wiley Law)
Raw Materials (Bullish, Mostly Priced In). LME Copper has surged to a 22-month high this week, but some analysts caution about the recent strength. In a note from late last week, Macquarie Bank stated, “The underlying narrative remains very positive, both from a challenged supply perspective and with regards to cyclical improvements in global growth. However, the near-term move looks to be driven by financial flows, both discretionary and systematic moment driven, and is arguably getting ahead of itself now.” (Source: Bloomberg)
Rio Tinto, a top copper supplier, recently reiterated that investment in mining projects remains lackluster and far below what the world needs to supply the energy transition. "The gap is humungous, and I am actually very worried about whether we will be able to close (it). The mining industry has reduced its investments significantly since the 2015-2016 period ... We're hundreds of billions of dollars below what we need.” These comments were made at the Ecosperity conference in Singapore on Monday. (Source: Reuters)
Due to the significant rally over the past several weeks, several large Chinese copper smelters will boost exports. According to anonymous sources quoted by Bloomberg, two of them are planning to ship 10,000 mt to either LME or SHFE warehouses. China remains the net importer of refined copper, but some producers ramp up exports when the arbitrage is advantageous. (Source: Bloomberg)
Speculative Positioning (Equally Bullish/Bearish, Priced-In) Investment fund positioning in LME aluminum surged again last week, according to the LME’s most recent COT report. As of last Friday, investment funds, which are generally speculators in metals markets, are net long approximately 75,720 contracts, making this the largest net long position they have had in nearly two years. Given the price surge this week amid the US, UK, and LME’s ban on imports and deliveries of newly produced Russian aluminum, it's likely that investment funds added to this already significant long position this week.
Like aluminum, investment funds continue to buy LME copper, albeit at a lower volume. Last week, according to the same COT report, these funds added approximately 4,500 (net) contracts to their long position. This brings the total net long position to about 44,800 contracts, the highest level since early 2021. AEGIS cautions that the position in early 2021 was a record, and it's unclear if funds will set a new record in the coming days or weeks.
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)