LME markets operated on a short schedule of 4 sessions this week, amid the Easter holiday. We continue to highlight that Copper, Aluminum, Zinc, and Nickel are up an astonishing 42% to 79% over the past year. Even amid increased volatility over the past month, all the metals AEGIS currently tracks, are in the black year to date. IHS Markit reported that US manufacturing rose in early March due to strong new orders growth, but supply chain disruptions and inflationary commodity markets continue to cause cost pressure for manufacturers.
We’re starting to see more analysis around what’s actually in the latest plan proposed by the Biden administration. Macquarie Bank published a piece and commentary this week that highlights the various areas of spend. They note that although the current plan lacks much level of specifics regarding how the spending will translate into metals volume, it would be supportive of metals markets, particularly steel and copper. The plan will likely not add enough demand to materially alter the global supply/demand picture.
Bottom Line: Consumers of metals are facing stiff headwinds; Year to date metals prices remain well above 2020 averages. It has been a painful start to the year for consumers holding out for a return to lower prices. If your hedging has not already commenced for the remainder of the year, consider optimally layering in hedges to narrow the range of possible outcomes and ensure that budgets stay within reach. Consider a trailing stop-loss strategy to add discipline to your hedging approach and make sure you understand when margin compression will impact overall company performance. In addition, as the months-long rally thunders on, buying call options or zero cost collars may be an attractive way to provide protection while allowing participation in lower prices if the rally stalls.
There is always the potential for short-term volatility and pullbacks, but base metals overall appear poised to find support from increased consumer demand, physical market imbalances, low short-term interest rates, high freight and logistics costs, continued global stimulus, and a relatively weak U.S. dollar.
Despite a late week selloff, LME Aluminum cash price rose to $2246.75/mt, up 2% over the four trading sessions. Growing demand combined with supply chain constraints continue to be the main economic drivers and have propped up both LME and MWP prices. A weaker dollar helped boost prices this week. The Aluminum Association among others is laying out their argument for changes to tariffs and trade policy.
Cash-3mo spreads are starting to tighten once again, standing at a $15 contango compared to $22 a week ago. The upward sloping forward curve incentivizes cash and carry inventory financing strategies while supporting both LME prices and geographical premiums. Further out the curve, Dec’21/Dec’22 widened to $17 contango compared to $10 last week while there had been a modest backwardation earlier in March. This could be due to less producer activity in Cal22.
Midwest Premium commentary
At risk of sounding like a broken record, consumers are confronting ever higher Midwest Premiums with the April CME contract settling at 21.49¢/lb, up 0.24¢/lb from last week. Short-term, there are very few bearish views from consumers, producers, analysts, or traders. CME Midwest premium offers through January 2021 are above 20.25¢/lb as Biden administration officials continue to indicate support for tariffs. 1H2022 is seeing daily settlements at 18.25¢/lb, however, consumers are not showing much interest out a year as they struggle to get current deliveries. Premiums in Japan and Europe are also finding support due to pandemic induced supply chain struggles.
With some fabricators building safety stock and a relatively flat nearby forward curve, it may be prudent to consider selling forward Midwest Premium in the right situation. If MWP further out the curve becomes a one-way sell trade, the relatively flat forward curve could quickly return to a steeper backwardation, thus becoming a more expensive means to protect inventory values, but also an opportunity for pure consumers.
Copper cash prices climbed 1.6%, to close at $8,935.25/MT, a modest increase on the back of news that Chile is once again closing its borders due to a rise in Covid cases. The news broke over the weekend while markets were closed. The initial reaction was a market rally but concerns began to fade as the week progressed. Some concerns remain that the border closure will create shipping problems and other supply chain issues arising from the increased security and testing requirements. Chilean copper output was down 5% in February according to the national copper commission, Cochilco. The production decrease marks the 8th consecutive month of declines in YoY output for the country.
Nickel prices recovered a bit this week to end at $16,650/MT on the 3-month contract. With the 2.6% climb in the cash price, Nickel is now back in the black year to date. According to SMM, March Chinese nickel sulphate production climbed 44% MoM while refined nickel output fell 4.62%MoM. Marex reports that speculative positioning in the LME contract is relatively flat. In other battery market related news,Tsingshan Holding Group, based in China and currently producing nickel and stainless steel, announced they plan to invest $1.57B in the Southern province of Guangdon to build a lithium-ion battery production plant.
CME Hot Rolled Coil (HRC)
Depending on which physical HRC index you follow, prices either rose or fell slightly from last week but overall remained flat in the $1,320-$1,330 range. The CME HRC futures contract for Apr ’21 is offered at $1,352, up $4 from last week’s closing price. AMM is reporting that import prices is Asia may reach as much as $1,000/ton. The Asian HRC market has lagged the rest of the world as steel prices have climbed higher. At least part of the increase can be associated with uncertainty over whether China will lower its export tax rebates for steel products. If the rebates are lowered or removed, market participants expect buyers to pay more to account for the loss of rebate revenue to producers.