Market Insights > Metals

Base Metals Dashboard - Week Ending October 21, 2022

October 21, 2022 | Chris Stadele

Aluminum

An abrupt increase in London Metal Exchange (LME) aluminum stocks has some wondering: where did it come from? Glencore has reportedly delivered “significant amounts” of Russian aluminum to South Korean LME warehouses, according to anonymous sources cited by Reuters on Wednesday. AEGIS notes that Glencore and others could be offloading this aluminum before the exchange possibly bans such deliveries. On Monday, the LME announced that 23,525 mt of aluminum was delivered to its registered warehouses in Gwangyang, South Korea, a regular delivery point for Russian aluminum, according to traders recently interviewed by Reuters. Earlier this month the LME launched a discussion paper outlining possible actions against Russia, including an outright ban on its metals. These possible actions stem from Russia’s ongoing conflict with Ukraine.

Including the South Korean deliveries, the LME system has seen an especially large and sudden surge in aluminum stocks this week, as shown in the chart, above. LME warehouse aluminum stocks have increased by nearly 55% this week, as 202,800 mt of aluminum has been delivered into the LME system. LME warehouse stocks now total 570,000 mt. AEGIS notes that if traders continue to deliver large volumes to the LME, aluminum prices could fall not because of a change in the supply-demand balance, but because of increased selling interest in the exchange-traded product..

China’s weakening property sector, recession fears in Europe and the US, and waning consumer confidence could weigh on commodity prices and demand, according to Rio Tinto. The company also believes China’s exports could drop as global demand slows. Regarding aluminum, Rio says smelter curtailments in Europe and China were not enough to offset weakening European demand; prices therefore retreated, despite large decreases in supply. However, Rio thinks aluminum demand in the US and Canada remains strong, and demand is improving in China. As for copper, the company cited the strengthening US dollar, interest rate hikes, and poor economic outlook as contributors to poor market sentiment. Nevertheless, supply concerns and low LME copper stocks have partially supported prices. Rio Tinto stated these comments in its 3Q production results, released on Tuesday.

Copper

Chilean copper miner Codelco is offering European buyers a record-high import premium of $234/mt for 2023 shipments, according to Reuters. This is the premium over LME cash price that European importers agree to pay for physical copper shipments and is seen as a global benchmark for such contracts. Codelco’s annual premium is normally a non-event for global prices, as this premium was a very stable $98/mt for 2019 through 2021 deliveries. However, such a rapid increase in the premium could be a bullish indicator of LME prices; buyers may be struggling to source non-Russian metal. One anonymous source interviewed by Reuters stated as much, proclaiming that European buyers are shunning Russian copper and need to look elsewhere for inventories.

Steel

Market prices for steel and busheling ferrous scrap show mill profitability has eroded, and forward prices do not look much better. The HRC-to-busheling-scrap price spread was last $424/st, based on Argus’s most recent HRC and #1 Busheling Ferrous Scrap price assessments from earlier this week. The price spread between HRC steel and busheling ferrous scrap is often used as a gauge for steel mill profitability.

After reaching a record $1,441/st in September 2021, this price spread has steadily dropped throughout 2022, even during a brief price spike for both assessments in February and March. And forward pricing doesn’t look any better for the mills. Based on today’s forward curves, this spread averages about $390/st throughout 2023.

During February and March, prices for busheling scrap rallied sharply as steel mills feared the Russia-Ukraine conflict could cause a pig iron shortage. Pig iron, which can be substituted for busheling scrap in certain furnaces, is a key export of both Russia and Ukraine. However, exports from that region continued, and the concerns over a pending pig-iron shortage came to pass. This in turn caused prices for busheling scrap to plummet since late March. In a similar motion, prices for HRC steel surged in February and March as service centers, fearing the forthcoming raw-material shortage would suppress steel production, scrambled to buy finished inventory. Since then, service centers have largely stopped buying as they attempt to draw on excess inventories, thereby suppressing HRC prices.

LME Aluminum

LME Aluminum 3M settled at $2,206.00/mt, down $100.00/mt on the week.

Aluminum prices were down about $100/mt this week, so the forward curve has shifted lower by $100/mt also. The shape of the forward curve remains the same. It remains in contango, meaning that spot prices are lower than futures prices. Those that are carrying aluminum inventory and are concerned about decreasing prices might consider hedges that provide downside protection, such as selling swaps or buying put options. Such positions are standard; however, they can result in opportunity costs or cash costs if metal prices increase. Please contact AEGIS for specific strategies that fit your operations.

Midwest Premium

Prompt month CME MWP last settled at 21.0¢/lb this week.

The CME Midwest Premium contract was essentially unchanged 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.

* Please note all these charts are for desktop only.*

LME Copper

LME Copper 3M settled at $7,624.00/mt, up $85.50/mt on the week.

Compared to last Friday, LME Copper's forward curve has shifted higher about $100/mt. Prices throughout the curve are relatively flat. 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 their risk tolerance. Please contact AEGIS for specific strategies that fit your operations.

LME Nickel

LME Nickel 3M settled at $21,949/mt, up $172/mt on the week.

As prices rose this week, nickel’s forward curve has also shifted higher, by about $200/mt. It remains 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 settled at $762/T, up $11/T on the week.

For CME HRC Steel, liquidity is low for swaps, but hedging can still be done with 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.