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). Last quarter, the Aluminum Corporation of China (Chalco), the world's largest aluminum producer, reported a 39.6% increase in profits compared to a year ago, even though revenue dropped by 26%. Aluminum production jumped by 16% to 1.78 million mt, while operating costs fell by 31%. Operating costs should continue to fall while Chalco continues to build self-sufficiency in bauxite supplies. (Source: Bloomberg)
Due to higher aluminum prices elsewhere, Rusal could seek out new Asian buyers outside of China, according to Shanghai Metal Market (SMM). Even though this is possible, SMM still believes that China’s domestic aluminum prices will remain supported due to stimulus measures and improving demand. China is the top buyer of Russian aluminum, and similarly, nearly all of China’s primary aluminum imports come from Russia, according to Rusal and Chinese government data. (Source: Bloomberg, China Customs, Rusal)
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 been relatively rangebound in late April and early May. As of this writing, the prompt month June ’24 contract now sits near $1.90/MMBtu. The market remains in a steep contango, with the January ’25 contract nearly $1.85/MMBtu higher than June ’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 May 1, the US Federal Reserve left interest rates unchanged at 5.25 to 5.50%. 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). On Tuesday, April 23rd, Mexico announced new tariffs on imports of steel and aluminum for countries in which it does not have a free trade agreement. The repercussions of these new tariffs are yet to be known, but two well-known US-based aluminum industry organizations slammed the ruling, stating that the tariffs do not address how much aluminum is imported into Mexico, remelted, and then sent to the US. We are currently working on a blog post to detail this further and aim to get it published shortly. If you are concerned about the potential impact and/or would like to discuss hedging strategies, please reach out to AEGIS.
Raw Materials (Bullish, Mostly Priced In). Chinese refined copper production was nearly an all-time high last month, despite reports that these smelters have struggled to source raw materials. Last month, daily smelter production averaged 37,000 mt, nearing the all-time high of 38,000 mt/day set last November. Total production in March was 1.147 million mt, up 7.9% compared to a year ago. Similarly, year-to-date production is up 10% compared to last year. According to recent reports, Chinese copper smelters have experienced problems with sourcing raw copper due to mining productions in Central and South America. (Source: Bloomberg)
Chinese buyers are stepping back from purchases, several domestic market participants have stated. This is particularly true for fabricators, who are price-sensitive, especially in times of uncertain demand. At an industry conference earlier this week, Gu Yan, director of copper at Citic Metal Co., stated, “Demand from fabricators is very weak after the recent rally. There is only a bit of demand from the renewable-energy sector, not much from any other markets. Fabricators are all waiting for a price correction to get a breather.” At the same conference, Wang Wei of Shanghai Wooray Metals Group Co. echoed similar comments, proclaiming, “Fabricators have struggled to pass on higher costs to their customers, forcing them to rein in purchases since March. (Source: Bloomberg)
Speculative Positioning (Bullish, Surprise) Contrary to normal trading and price reaction, LME aluminum prices fell while spec traders increased their long position. As of last Friday, investment funds, generally speculators in metals markets, bought a net 9,200 contracts, bringing their total net long position to approximately 103,460 contracts. However, prices fell about 4% last week while funds were increasing their net long position. This is highly unusual, as investment fund positioning is normally positively correlated with price action. (Source: LME)
Meanwhile, in the copper market, both prices and investment funds’ long position increased. Investment funds purchased about 4,950 net contracts, while prices rose by roughly 1%. This should be considered normal, positively-correlated action. Investment funds are now net long 55,660 contracts, reaching another new all-time high last week. (Source: LME)
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)