Despite a setback on Friday, base metals prices continue to churn higher. Backwardation in several metals’ forward curves continue to make the yield attractive for bullish investors rolling forward their long positions. The general theme continues to be strong current demand testing stressed supply chains and longer-term bullish outlook in anticipation of further stimulus and pandemic recovery.
The US House of Representatives appears set to pass the $1.9T coronavirus relief bill, even amid Republican opposition. The Democrats have reportedly targeted March 14th to get the bill signed by President Biden to avoid unemployment aid expiration.
Bottom Line: Consumers of metals are facing stiff headwinds; 2021 base metals prices started off the year above 2020 averages and have accelerated higher in February. It is prudent to set budgets well prior to the upcoming year so hedging strategies can be more effective at meeting profitability goals. If your hedging has not already commenced for the remainder of the year, consider layering in hedges to narrow the range of possible outcomes and ensure that targets stay within reach. 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 as seen at February month-end, but base metals overall appear poised to find from increased consumer demand, physical market imbalances, low short-term interest rates, strong Chinese recovery, continued global stimulus, and a weak U.S. dollar.
Aluminum prices consistently climbed higher throughout the month of February, but ended with a whimper as LME 3mo price dropped by $61.50 on Friday, settling at $2,157/mt. Despite the day’s selloff, LME cash price for February averaged $2,070.60 compared to $2,003.80 for January. We continue to hear of processors struggling to get their hands on metal to keep their plants running at full capacity. It is almost always a fool’s errand to try to predict when the market will peak but momentum seems to point to higher prices. A modest recovery in USD with DXY indexed at 90.90 as well as month-end profit taking helped explain Friday’s drop, so we will see where March takes us. For those consumers utilizing month-prior pricing, one-quarter of 2021 pricing has been set and it is a good time to evaluate budget costs and EBITDA to see if hedging can help preserve those goals.
Cash-Mar is in $18 backwardation as shorts once again face a month-end squeeze. Despite the steep nearby back, Cash-3mo stands at $4 contango. There has definitely been some gyrations of the nearby forward curve Cash-March is in $1 backwardation so keep an eye on that through the end of the month. Beyond March, the curve is in a normal contango.
The US Department of Commerce announced antidumping and countervailing duty margins on some aluminum foil out of China this week.
Midwest Premium commentary
Midwest Premium continues to grind higher in lockstep with higher LME prices. CME February contract is at 15.55¢//lb with March last trading at 16.25¢//lb. Supply chain issues continue to support higher MWP levels. With the slight contango, processors with a one-month lag in pricing from purchase to sale can lock in a modest gain on MWP for purchases that already priced in February.
Copper reached $9,600 before retreating to close out the week, however remains higher WoW to close the week at $9,139.25/mt, $10,000 a ton no longer seems unrealistic based on the current market trajectory. Commerzbank analysts report that fundamentals are driving copper prices higher as the International Copper Study Group now estimates that the market will be in a deficit of 589k tons this year. Apparent demand in China looks to rise 14% attributing to the deficit. Macquarie banks’ Beijing based Strategist notes that the China fabrication market has slowed due to the fast rise in prices as downstream buyers wait for a potential correction.
Nickel had its first down week in recent memory, dropping 5.3% this week, yet still remains 12% higher YTD. On the demand side of the equation, stainless steel production and anticipated increases in EV battery production continue to lead the conversation. However, Macquarie Bank has reduced their current assessment from a surplus of 120 kt to just under 50 kt, even amidst strong supply growth from Indonesia.
CME Hot Rolled Coil (HRC)
HRC prices continued to climb higher and reached a new record high this week, with current assessments around $1,225 per short ton. The pullback some were expecting to end 1st quarter doesn’t seem likely as mills and distributors are reportedly incredibly tight on supply. The forward curve backwardation continues to flatten with prices now over $1,000 per short ton through July of 2021. The forward curve implies that prices may remain higher than most have previously estimated.