From a momentum standpoint, we like to compare the 50-day moving average LME cash price to the current cash price. For the eleventh time in twelve months the bullish signal has continued at month-end with cash price $204 greater than the moving average. Keep in mind that moving averages are not a good indicator of when a reversal might occur, but the persistent bullish trend has been stunning. LME Aluminum cash price steamrolled higher by $105/MT to end the week at 2,407.50/mt. With strong demand, the need to obtain metal continues to outweigh higher costs. By week’s end, the USD had strengthened making the large move up in aluminum price even more impressive. The long streak has been a constant reminder to stay consistent with disciplined hedging strategies rather than hesitating by speculating on direction of next price move
Cash-3mo spreads tightened significantly this week and are now in a backwardation of $10.50 compared to $4.75 contango last week. Earlier in the week, the Port Klang LME warehouse saw a one-day increase of 61,150 mt in warranted metal as the sporadic short squeeze has returned. Contango in the forward curve incentivizes cash and carry inventory financing strategies while the backwardation can force deliveries of short positions. Further out the curve, Dec’21/Dec’22 backwardation increased to $9 as producers have been able to sell forward at levels well above anticipated input costs.
Midwest Premium commentary
Cash Midwest Premium has reached an all-time high according to industry leading pricing publications. Today’s premium has exceeded 2018 levels which were driven at the time by a combination of the new Section 232 tariff and UC Rusal sanctions. Premiums have also exceeded those seen in 2015 when LME longs were subject to multi-year queues to remove metal from Detroit and Vlissingen warehouses. LME rules have since addressed the queue escapades, however, the remaining Section 232 tariff, quotas, and pandemic impacts have once again caused turmoil for MWP prices.
CME MWP for April stands at 23.43¢/lb with one pricing date remaining. May bid/ask is over two cents wide at 23.70¢/lb / 25.75¢/lb making the use of MWP swaps relatively unattractive for nearby offers and most bids. Other than the high volatility inputs to pricing, MWP seems to be a market that is poised for more options trading, particularly with longer term uncertainty in tariffs. We are happy to discuss alternative strategies for pricing to your customers or for hedging your premium exposures via swaps or options.
LME 3 month copper prices flirted with and briefly touched the magic $10,000/mt number this week before pulling back to end the week at $9,552 up another 2.6%. Speculative investor interest continues to increase with copper backwardation easing cost of rolling forward futures positions. Some concern about industrial demand helped pause the rally with some end of month profit-taking. The copper/aluminum ratio stood at 4.07 this morning further indicating that copper could be overbought. StoneX shares the sentiment that current prices may be becoming overweight. They point out that Chinese demand from wire rod and wire and cable producers is down, with some even shutting for the upcoming Labour Day holiday May 1st-5th as prices have become unattractive for manufacturers.
Nickel prices bounced back this week, with cash prices climbing 7.9% to $17,653.00. According to Maquarie Bank, 1st quarter nickel production fell slightly quarter over quarter and the Nickel market has moved into a deficit that is expected to continue into Q2. On the supply side, they also note that China Hongqiao has registered a new entity that is expected to build a smelter with a capacity of 2mtpa utilizing hydro power in the Yunnan province.
CME Hot Rolled Coil (HRC)
US domestic HRC prices continue to climb, with physical indices approaching $1,500 per short ton. The CME HRC futures contract for May ’21 is currently offered at $1,562/ton, up $32 from Thursday’s settlement. The longer dated curve remains downward sloping, however the shorter dated contracts of June, July, and August are now at a premium to spot spot. The CME contract for Dec ’21 is currently offered at $1,360/ton. Opportunities remain open for HRC consumers to hedge future prices below the current spot price as the supply/demand picture continues to take shape. The opportunity to hedge inventory or HRC sales continues to improve and we continue to believe that selling put options remains the best structure to achieve protection against a market correction.