Market Insights > Metals

Base Metals Dashboard - Week Ending July 22, 2022

July 22, 2022 | Chris Stadele

Global cobalt supply could drop this year. The Congo-based Tenke Fungurume copper and cobalt mine, which is the world's second-largest cobalt mine, has suspended all cobalt exports, effective July 16, according to Reuters. A court-appointed administrator requested the stoppage, as the Tenke Fungurume mine is currently in the midst of a dispute between majority-owner CMOC, a Chinese mining concern, and minority-owner Gecamines, a state-owned Congolese miner, over how to market the mine's output. CMOC is denying the administrator access to the mine site. Gecamines has accused CMOC of understating the mine's reserves to reduce royalty payments CMOC pays to Gecamines. Logistics companies were made aware of the stoppage late last Saturday.

Due to an ongoing semiconductor shortage, North American vehicle production will drop by 348,000 units in 2022, according to forecasting firm AutoForecast Solutions. This is an increase of 71,000 from their prior estimate of 277,000 units. Based on Argus’s calculations, approximately 258,000 short tons of flat-rolled steel demand will be lost due to the automotive production shortfall. According to the American Iron and Steel Institute's (AISI) Automotive Program, the average North American vehicle contains 1,980 lbs of steel, of which approximately 1,480 lbs are flat-rolled products and 486 lbs of aluminum.

If BHP is correct, inflationary pressures, supply chain constraints, and labor market tightness could affect copper mining production in 2023. This could put upward pressure on copper prices. The company stated its concerns about 2023 production in its 2022 Operational Review that was released on Tuesday. They also expect that the European energy crunch, Ukrainian war, and central bank interest rate hikes could impede global economic growth in 2023. However, BHP believes that Chinese stimulus measures to be a positive influence on the global economy.

Continuing on copper, prices surged on Monday after Chinese officials over the weekend stated that they are “urging” banks to increase loans to real-estate developers to finish incomplete projects, according to Bloomberg. Monday’s positive price action comes after last week’s drop of 7.8%, the largest percentage decline in a year. Last Thursday, Bloomberg cited a “plethora” of reasons for copper’s recent price plunge, including US Federal Reserve interest rate policy, China’s real-estate mortgage problems, and slowing economies in Europe. Last week, Goldman Sachs cut their three-month price target for copper to $6,700/mt, down from $8,650/mt, as a gloomy demand outlook could weigh on prices into 3Q and 4Q.

Finally, regarding Chinese real estate, a growing mortgage payment revolt could weigh on copper and aluminum demand. Apartment owners in China typically begin mortgage payments during construction; however, an increasing number of borrowers have begun withholding payments to protest construction delays. This crisis, which started in June, has rapidly grown to over 300 housing projects in about 91 cities, according to Bloomberg. Analysts polled by Bloomberg estimate the current total of at-risk mortgages is valued between $150 billion and $370 billion. Several analysts think this number will grow because they believe banks are underreporting loan defaults.

LME Aluminum

LME Aluminum 3M settled at $2,475.50/mt, up $132.50/mt on the week.

Compared to last Friday, aluminum’s forward curve has shifted higher by approximately $150/mt, but its shape is essentially the same. It remains in contango, meaning that spot prices are lower than futures prices. This allows aluminum producers to hedge future sales at prices higher than that of spot prices. The aluminum market has sufficient liquidity to use swaps and options. If you are a consumer of aluminum, you 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 28.8¢/lb this week.

The CME Midwest Premium contract was steady this week and remains in backwardation. The CME Midwest Premium swap market is thinly traded, and there is no options market. Hedging in this thinly traded market is challenging, 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 $7,452.50/mt, up $262/mt on the week.

LME Copper's forward curve is now in contango, meaning that spot prices are lower than futures prices. It has shifted vertically higher by approximately $250/mt. 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 $22,122/mt, up $2,737/mt on the week.

Nickel’s forward curve shifted higher this week, and is in 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 $923/T, up $8/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.