In March, the London Metal Exchange (LME) suspended its nickel contract after the price rose to more than $ 100,000 per tonne. Three-month nickel is now trading at around $ 22,500, almost where it was before the downturn in the chaos.
Copper, aluminum, zinc and tin peaked in March. Lead was the only LME base metal that missed the super bull party.
After the March smelting, however, industrial metals are now in smelting. The LME index has just experienced its strongest quarterly drop since the global financial crisis.
The turn of sentiment from super-bullish to super-bassist has been the launch on February 24 of what Russia calls its “special operation” in Ukraine.
Fears of sanctions against Russian metal helped bring prices to those all-time highs in March. But flows of Russian aluminum, copper and nickel have not been affected so far.
Rather, traders are now focusing on the recessionary impact of high energy prices as the Russian invasion progresses.
The bears go out to play
The positioning of investors in industrial metals has gone from long to short in recent weeks, with systematic funds responding to chart failures and the push of falling prices by raising low bets.
Money managers had a long net of the CME copper contract for an amount of 42,000 contracts in early April. The net short is now at 25,402 contracts, the lowest bearish position since April 2020.
The last remaining oxen are throwing in the towel. Fund long positions have been reduced to a two-year minimum of 33,926 contracts.
This is symptomatic of the broader landscape of metal investors, with heavier funds reducing long-term passive exposure and systematic trend-tracking funds selling to weak prices.
LME broker Marex estimates that there are now significant speculative short positions throughout the London market complex, many of them close to multi-year highs in terms of size.
China to the rescue?
It is not difficult to understand the bearish reason of investors.
High energy prices are fueling inflation and central banks are responding with a tougher policy.
They are also starting to cool the manufacturing activity.
The latest series of purchasing managers ’indices captured stagnant growth in Asia, the United States and Europe.
China is the potential bright spot of the world economy, with manufacturing activity expanding in June for the first time since February, as the country gradually emerges from progressive blockades during the first half of the year.
Still, there’s a lot of caution that China’s recovery may still be held back by Beijing’s zero-covid-19 policy, with several cities easing restrictions over the weekend as new cases emerged.
Clearly, Chinese players are playing metals like copper from the short side.
Marex estimates that the collective short position in copper contact of the Shanghai Futures Exchange, expressed as an open interest rate, is as high as since 2008.
This speaks to a lack of conviction about the strength of any recovery of the world’s largest metal user.
Liquidity trap
The speed of the collapse of commodity prices is partly explained by a drain on liquidity on the London Metal Exchange following its controversial suspension of the nickel market and the subsequent cancellation of operations.
LME volumes have been sliding since then. Commercial activity in the second quarter fell by 13% over the previous year and by 21% over the first three months of 2022.
Nickel is the most obvious victim, prone to large price fluctuations at low volumes, but this is a broader problem for both the LME and the physical supply chain.
The lower participation of investors and industry in the LME leaves market share increasingly dominated by short-term systematic funds.
The resulting high volatility is reducing the financing capacity of physical players as banks re-evaluate their exposure to the metals sector.
The revenge of the micro?
It is possible that these funding constraints could lead to metal entries into LME warehouses, reversing a defining trend of recent months.
Total stocks of all metals amounted to 696,000 tonnes at the end of June, down from 2.36 million tonnes the previous year.
Currently, the available LME zinc inventory is only 22,050 tons, which is why time intervals have been reduced, the three-month cash premium for the metal increased to more than $ 200 per tonne last month , although the total price was falling.
This is the disconnect between micro and macro right now. Recessive sadness is crushing all micro-positives, such as dangerously low zinc inventory coverage.
Or the lengthening of the list of reductions in aluminum smelters in Europe and the United States, as high energy prices affect a notoriously energy-intensive sector.
Alcoa has become the latest producer to announce a 54,000-ton capacity cut at its Warrick smelter in Indiana, citing “operational challenges.”
The entire Western aluminum supply chain is in an operational challenge right now. So it is for zinc. Physical premiums for both metals remain extremely high, especially in Europe, where regional production losses have been exacerbated by logistical problems.
It is a sign of the extraordinary supply tensions in the West that China has been exporting both aluminum and zinc despite high tariffs on refined shipments of refined metal.
With no relief in sight for electricity prices in Europe, regional metal smelters face margin problems until further notice.
The LME paper market is charging a recessionary price on demand and at the same time ignores the still bullish fundamental history of low stocks and constant supply chain stress.
The mismatch is getting more and more serious, and it may only be a matter of time before the ever-increasing short positions collide with ever-smaller stocks.
Combined with erratic liquidity, there is a good chance that there will be more metal boom and fall in the second half of 2022.
(Edited by Jan Harvey)