Market Insights > Metals

Base Metals Dashboard - Week Ending May 6, 2022

May 06, 2022 | Chris Stadele

Bottom Line:

The COVID outbreak in China, which started in March and worsened in April, has softened the country’s demand for copper. LME Copper 3M Select is now down 3.8% for the year and 13.5% from the March highs. Approximately 180 million people in China remain on full or partial lockdown, according to recent statistics from CNN. These areas represent 40% of China's total output and 80% of its total exports, according to Capital Economics. Lockdowns are likely to cut into economic activity, and therefore, demand for copper. Data released last week by China’s National Bureau of Statistics shows that manufacturing activity in April slowed due to lockdowns.

Notable Metals News

Like copper, aluminum demand has slowed. A continuing semiconductor shortage and subsequent slowdown in automotive production have crippled aluminum demand, according to Bloomberg. The automotive sector represents nearly 31% of U.S. aluminum needs, according to The Aluminum Association. Automotive executives recently quoted by Newsweek believe the semiconductor shortage will last through 2023. These factors could hinder aluminum demand and prices.

Prior to China’s lockdowns and economic stall, some aluminum producers benefited from rising prices. Revenue for Norsk Hydro jumped 46% year-over-over in 1Q2022 due to rising alumina and aluminum prices, according to their investor presentation released yesterday (May 5). They believe that global aluminum demand will exceed production, leading to a supply deficit, as high energy prices plague European smelters. The company expects its aluminum, bauxite, and alumina divisions to see rising raw materials costs in the second quarter. Norsk produced 540,000 mt of primary aluminum in 1Q2022, nearly unchanged from 1Q2021. Norsk Hydro is one of the world’s largest aluminum producers, according to Reuters.

AEGIS notes Europe has recently set goals for reducing Russian gas flows, and instead sourcing new gas mostly from increased liquefied natural gas (LNG) shipments by waterborne tanker. Oil imports are facing similar debates. Depending on how those policies unfold, energy costs may remain elevated in Europe for years, and could get worse faster than they get better.

Finally, MW Busheling Fe scrap prices could increase if U.S. steelmakers decrease their reliance on iron ore. U.S. steel mills prefer more scrap in furnaces, according to S&P Global. The Russia-Ukraine conflict has upended supply chains, and steelmakers such as Nucor and Steel Dynamics have distanced themselves from Russian pig iron, according to Bloomberg. Pig iron is produced by smelting iron ore and is later produced into steel. Producing steel by recycling steel scrap requires less energy than via iron. The U.S. imported 3.9 million mt of iron ore in 2021, according to USGS data. On average, approximately 4% of U.S. iron ore imports come from Russia.

LME Aluminum

LME Aluminum 3M settled at $2,842.00/mt, down $210.50/mt on the week.

The forward curve for LME Aluminum has a slight contango in summer 2022. However, starting with the October 2022 contract and beyond it becomes backwardated, meaning that spot prices are higher than futures prices. A backwardated forward curve favors the consumer hedger. The aluminum market has sufficient liquidity to use swaps and options. Consumers might consider strategies that use only swaps or options or a combination of both, depending upon your risk tolerance. Please contact AEGIS for specific strategies that fit your operations.

Midwest Premium

Prompt month CME MWP last settled at 38.4¢/lb this week.

The CME Midwest Premium swap market is thinly traded, and there is no options market. Hedging in this market is tricky, so we recommend using strategically placed limit orders. Please contact AEGIS for specific strategies that fit your operations.

LME Copper

LME Copper 3M settled at $9,414.50/mt, down $355/mt on the week.

The forward curve for LME Copper is essentially flat until summer 2023, but then becomes slightly backwardated. A backwardated forward curve favors the consumer hedger. The copper market has sufficient liquidity to use swaps and options. Consumers might consider strategies that use only swaps or options or a combination of both, depending upon your risk tolerance. Please contact AEGIS for specific strategies that fit your operations.

LME Nickel

LME Nickel 3M settled at $30,076/mt, down $1,695/mt on the week.

Nickel’s forward curve is in a slight contango, meaning that spot prices are lower than futures prices. The nickel market has sufficient liquidity to use swaps and options. Consumers might consider strategies that use only swaps or options or a combination of both, depending upon your risk tolerance. Please contact AEGIS for specific strategies that fit your operations.

CME Hot Rolled Coil (HRC) Steel

Prompt month HRC Steel last traded at $1,378/T, down $22/T on the week.

For CME HRC Steel, liquidity is low for swaps, but hedging can still be done with strategically placed limit orders. The same is true for options. Similar to other metals, a combination of both swaps and options might work in certain cases, depending upon your risk tolerance. Please contact AEGIS for specific strategies that fit your operations.