Market Insights > Metals

Base Metals Dashboard - Week Ending January 28, 2022

January 28, 2022 | Chris Stadele

Bottom Line:

Despite escalating tensions over the Russia-Ukraine crisis, metal prices were mixed this week. Russia is a major metals producer and exporter. In 2020, the country produced an estimated 3,600 thousand mt of aluminum and exported 2,693 thousand mt of it. Sanctions or other export issues could further tighten global supplies of aluminum and other metals.

One interesting potential sanction on Russia would be disconnecting them from the SWIFT banking system. The SWIFT system is used for international bank transfers. However, this would harm both Russia and the countries to which it exports. The vice speaker of Russia's upper house of parliament noted its European customers “will not receive our goods — oil, gas, metals and other important components."

Notable Metals News

The copper-price rally in 2021 has led to increased revenue and profits for miners. Consolidated copper production for Freeport McMoran was 3.843 billion pounds in 2021, up from 3.075 billion pounds in 2020. Prices may have encouraged more production, too, as the company exceeded pre-Covid output, outrunning by over 0.5 billion its 3.3 billion pounds of copper produced in 2019. The company cites high milling rates in North and South America for the increase in production in 2021. Net income also increased sevenfold, from $599 million in 2020 to $4,306 million in 2021.

More copper supplies could reach the market in 2023. Rio Tinto has forgiven the $2.4 billion debt the Mongolian government owes the company for their joint venture Oyu Tolgoi copper mining project that would make it the world’s fourth-largest copper mine. This debt forgiveness paves the way for underground production to begin in 2023. An immediate effect on prices is unlikely. Rio Tinto CEO Jakob Stausholm recently stated that this debt forgiveness restores the company’s relationship with the government. Last year open-pit production of the mine was 149,200 mt, of which 50,200 mt was Rio Tinto’s share. Many market analysts point to long-term problems with copper supply as demand for the metal is expected to rise with increased electric-vehicle production.

Earlier this week, China’s Tsingshan Holding Group Co shipped its first batch of nickel matte from its Indonesia-based plant, according to Bloomberg. Production at the plant had begun last month. The company currently has three nickel matte production lines of nickel matte under operation with a capacity of approximately 3,000 tons/month of nickel content per line, with more production lines planned in the future. Nickel matte is an intermediate product that can be further processed into battery chemicals. This new production could ease supply constraints that currently plague the market. Nickel global production was 2,500,000 mt in 2020 according to USGS.

Due to shrinking demand, excess supplies, and rising inventories, Stelco CEO Alan Kestenbaum believes steel prices are a “falling knife,” meaning that prices might quickly fall. These comments after Mr. Kestenbaum several weeks ago stated that the Omicron variant has increased employee absenteeism for Stelco and its customers. Prompt month CME HRC (hot rolled coil) prices are down nearly $500/T, or approximately 26%, since late August 2021.

LME Aluminum

Aluminum prices continued to rally this week and now sit near the highs of 2021. The LME Aluminum forward curve is now even more backwardated than last week’s curve. This curve shape is a benefit to consumers, because they may hedge at prices lower than current cash or near-term prices. End users who have longer-term price risk might consider zero-cost collars or buying swaps in this backwardated market as pressure to the upside remains in play. Producers can sell forward a portion of forecasted production volumes using layered swap strategy at historically high prices to increase the likelihood of achieving revenue targets.

Midwest Premium

Those who have short-term (i.e., one to four months forward) downside inventory price risk in the Midwest Premium (MWP), might consider selling forward in a contango to flat market. This upward-sloping curve means some prices in the future are at a premium to near-term prices. Those who need to make sales further down the curve might consider hedging a smaller percentage of expected exposure.

The curve twists and becomes backwardated farther down the curve. End users who need to make forward purchases in the MWP might consider buying swaps in this backwardated market (where longer-term contracts are priced lower than the cash and near-term market). The MWP market is extremely thin, so please contact us for details on hedging opportunities.

LME Copper

LME Copper remains near recent highs. Copper’s forward curve remains in backwardation through December 2023. End users who have longer-term price risk might consider zero-cost collars in this backwardated market. Producers can sell forward a portion of production forecast using swaps at historically high prices to increase the likelihood of achieving revenue targets.

LME Nickel

Nickel prices dropped this week, but the shape of the forward curve is similar to last Friday. Like some other LME metals, nickel’s forward curve is quite backwardated.

CME Hot Rolled Coil (HRC) Steel

For CME HRC Steel, the backwardation is little changed from last week. The spread between February ’22 and March ’22 is now approximately $175/T. Layering into swaps with tenors throughout the second half of 2022 might be a logical tactic for end users. Low liquidity in the HRC Steel market makes hedging challenging, but it is still feasible. Contact us for strategies to execute hedges efficiently.