At the LME Asia Metals Seminar, the first discussion kicked off with a panel discussion on “The outlook for metals in 2023”, which covered various types of metals trends and the likely impact of these metals in the upcoming quarters.
Most recently, the nickel incident which happened in 2022 has led to discussion and the addition of new measures. LME has acknowledged that to prevent unbounded price moves on T+1 trades, several new regulatory measures have been put in place. For the upcoming quarters, Indonesia is anticipated to be the key driver to building itself into a powerhouse by encouraging downstream processes or increasing its own building projects.
In this discussion, 3 of the commonly traded metals, copper, aluminum, and nickel were presented by the speakers. To begin, this article will surmise the key insights from the LME CEO.
“In Conversation with” the LME CEO: Matthew Chamberlain
The geopolitical landscape has impacted the price of metals and some of these factors include the Ukraine conflict, the banking crisis, and expectations of quicker Chinese border opening. Among these problems, many concerns were voiced regarding the Nickel Incident.
In response, LME CEO, Matthew Chamberlain explained that the incident was a lesson learned as it has allowed LME to further secure trade flows and procedures. Specifically, Matthew states four key areas that were improved.
Firstly, the embedment of best practices such as daily price limits.
Secondly, the addition of liquidity, which allows traders to readily participate and invest in the market.
Thirdly, building the market to be ready for trends.
Lastly, the evolving of the industry and the exchange.
To date, additional functions such as the reopening of the market in Asian hours have seen great results. Even with volatility and various issues faced by LME, the 3-month nickel volume in April has increased by more than 10%. Overall, Matthew believes that the market operates in a somewhat cyclical manner, there are bad and good cycles, LME will focus on introducing new initiatives, restoring market confidence, and taking feedback from to improve trader experience
Ferrous Metals: Copper
Futures vs Swaps: Over the last 10 years, there has been a move of position off swaps to exchanges, which includes products such as metal futures (Copper futures, aluminium futures and zinc futures) and other more structured forms of trading products.
For the trading of commodities as an asset class, the market has also seen enhanced risk premiums and the growth of quant as a strategy.
For interest rates and volatility, it is noted that hedging copper in places such as Europe has been difficult, this is because the values and cost of hedging are much higher than the hedging position. Moreover, traders are also faced with other issues such as an increasing time frame, which also contributes to making the liquidity risks unmanageable. In general, traders are unable to take more than 3 to 6 months. From the supply side, marketing structure factors such as margin requirements and interest rates have also added to the cost of holding inventory.
Among the discussion, it is also expressed that copper from China is quickly losing support due to its massive bull trends, which have fallen under the expectations from traders that expected a western exit, border opening, and trade. Much of the fall in expectations is accounted to the excessive anticipation by traders.
On the other hand, activity from China is slowly picking up from those in the construction and property industries. In the short term, the lack of inventory will cause a supply chain buffer, and response time will slowly recover.
Ferrous Metals: Aluminium
The aluminium industry has consecutively been in 2 years of deficit, and a marginal surplus is expected for this year. Unlike the other metals, aluminium market is unlikely to restart due to the foreseeable lower power prices, which allow companies to continue production, coupled with the rise of market prices assessment of the restart process.
From China, regions such as Guizhou, Sichuan, and Guangzhou have restarted the cut capacity, and it is expected that 2024/2025 will see a surplus to continue sustaining new commissions.
LME Asia Week 2023, Zhu Yi, Global Head of Metals and Mining, Bloomberg Intelligence
From the demand side, China’s demand is also likely to improve due to government initiatives to revive property prices, the demand is likely to maintain in 2024, though there is diminished spending. Based on the Orient Futures Monthly Research Report for May, the orders from downstream sectors have also not been ideal. It is expected that May will face pressure with weakening trends compared to the previous month and it will be difficult to maintain high growth rates.
Traders that are executing risk management strategies can expect that aluminium prices will exhibit a predominantly weak and volatile trend in the coming month, with a slight downward shift in the volatility center. Based on inventory levels, hedging may be conducted by selling at higher prices, and closing positions when the main Shanghai aluminium contract falls to around 16,000 yuan/ton to 16,500 yuan/ton.
Some of the industries that may affect the aluminium demand include construction, home furnishing, instruments, meters, metal products, electrical equipment, aerospace, weapons and equipment, vehicles, computer equipment, automotive components, highways, and others.
东证期货_月度报告_产业研究_宏观风起，大宗价摇。多舛之际，风险何在？
Among the regions, Yunnan owns the largest capacity. The country currently faces a “green” boom in recycled aluminium where prices are expected to fall 9% based on the consensus last year, and it is expected to pick up next year.
Globally, raw alumina is also likely to face a surplus from new capacities in regions like India and Indonesia due to the commissioning of 2 new projects, Project Brownfield, and Project Greenfield respectively. For these countries, the pressure to build alumina for other purposes such as creating jobs, and infrastructure or raising spending is also a key goal.
Ferrous Metals: Zinc
Zinc was described as an underperformer due to its history of deficit for the past 11 years. Nonetheless, with the increased demand for products such as Electric Vehicles (EV), the market has seen a 2x increase in demand for aluminium, a 3x increase in demand for copper, and a 35x increase in demand for Nickel. Overall, this means an increase in the demand for metal intensity, which has approximately increased by around 2 million tons. To meet demand, new investments will need to be incentivized or it will remain a situation where demand meets supply with no inventory to spare.
In the future, there will need to be a significant increase in project gaps between demand and supply.
LME Asia Week 2023, Zhu Yi, Global Head of Metals and Mining, Bloomberg Intelligence
LME/London Metal Exchange New Platform
From LME, the exchange is embarking on a new journey to rebuild its electronic trading platform LMEselect. The platform is undergoing testing for the next year, and there will be 3 monthly updates (the next update will be on Sep 23). In total, the update is expected to end on March 24 and the platform will go live.
For more details regarding the market testing timeline, refer to the infographics provided here.
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