Market Insights > Metals

Base Metals Dashboard - Week Ending January 13, 2023

January 13, 2023 | Chris Stadele

*Please note that our offices will be closed on Monday, January 16 due to the Martin Luther King Day holiday. We will not produce a Metals First Look that morning. However, the trading desk will provide LME coverage, and current clients can contact metals@aegis-hedging.com for indications. *

Due to lower electricity costs, Aluminium Dunkerque, which owns and operates the EU’s largest aluminum smelter, has started increasing production, according to Bloomberg. The company plans to have output at full capacity by May. The plant, which produced 290,000 mt of aluminum in 2021, cut output by 22% last September as soaring electricity costs made smelting unprofitability. However, French month-ahead power prices have dropped over 80% from the October peak, thereby making aluminum smelting feasible again. According to Bloomberg, Aluminium Dunkerque buys most of its power through a French nuclear-power program known as ARENH. The remainder of its power needs is purchased at market prices. Thus, Aluminium Dunkerque has been able to endure the European power crisis better than other smelters. Throughout most of 2022, electricity prices across Europe surged to record highs because of decreased natural gas flows from Russia. (Source: Bloomberg)

AEGIS has been diligently tracking European smelter curtailments since the start of the Russia-Ukraine conflict. We note that this first announcement of a smelter bringing production back online due to the recent drop in electricity prices. We also note that Aluminium Dunkerque’s announcement comes just as global aluminum seems to be on the upswing. For example, China has just implemented a slew of economic stimulus measures that aim to boost its faltering real estate sector. Those measures, along with continued robust demand in North America, could be supportive of aluminum prices.

Extrapolating on Chinese aluminum demand and production, the country shipped a record amount of aluminum last year; however, decreasing global demand could weigh on exports this year, according to CRU Group. Therefore, they might attempt to shift production to the region where demand needs it, rather than serving customers through its own in-country surplus production. In early 2022, falling aluminum production across Europe due to escalating energy costs forced metals traders to grab up Chinese inventories. However, Chinese exports peaked in May, as Western buyers pulled back from purchases due to fears of a looming global recession. Due to falling domestic demand and the potential for climate-based tariffs on Chinese aluminum production, both CRU and the China Nonferrous Metals Fabrication Industry Association believe Chinese smelters should move production to regions where demand is expected to remain robust, such as North America. (Source: Bloomberg)

Alcoa is having some troubles with alumina production. Earlier this week, natural gas shortages in Western Australia forced them to curtail alumina production by 30% at their 2.2 million mt/yr Kwinana refinery, according to Bloomberg. Even though the natural gas supply is slowly being restored, yesterday Alcoa stated that one production unit at the Kwinana refinery remains offline. The company did not give a timeline on when full production will resume. This gas supply shortage caused the refinery to switch to diesel for its remaining operations for nearly a week. The natural gas supply outage was due to an equipment failure at a Chevron natural gas plant. However, on Wednesday, Chevron announced that they have resumed natural gas production at the plant and should be at full capacity “in the coming days.” Alcoa’s three alumina smelters produce approximately half the country’s production. At 21 million mt, Australia was the world’s second-largest alumina producer in 2021, bested only by China. (Sources: Bloomberg, Reuters, USGS)

Nickel

Tsingshan Holding Group Co., which is the world’s largest nickel producer, is reportedly in talks with several struggling Chinese copper smelters about switching to nickel processing, according to Bloomberg. This move, if successful, would essentially double China’s refined nickel to approximately 360,000 mt/yr. AEGIS notes this is the second expansion announcement by Tsingshan in as many months. In mid-December, the company announced plans to open a 50,000 mt/yr plant in Sulawesi, Indonesia by July 2023. According to unnamed sources recently interviewed by Bloomberg; however, Tsingshan might decide to double the size of the proposed Indonesian plant to 100,000 mt/yr. In 2021, total global refined nickel production was 2.7876 million mt, according to Shanghai Metal Market. (Sources: Bloomberg, Reuters, Shanghai Metal Market)

As Bloomberg recently stated, the recent moves by Tsingshan “could reshape global supply dynamics and inject fresh volatility into the battered nickel market.” However, nickel end users such as stainless-steel producers can mitigate this potential volatility by hedging with swaps. Please contact AEGIS for specific strategies that fit your operations.

Copper

LME copper prices are up almost 12% since last Wednesday’s (1/4/2023) close after China announced a series of economic stimulus measures. To boost slumping real estate demand, China lowered mortgage rates and down payment ratios for first-time home buyers, government officials announced last Thursday. The government is also considering easing borrowing restrictions on some property developers. According to government data, first-time home sales were down approximately 25% through the end of October 2022 compared to the same period in 2021. Also last Thursday, Chinese state media announced that 1,722 projects worth $945 billion are planned in the southern manufacturing hub of Guangzhou province. (Source: South China Morning Post, mining.com)

LME Aluminum

LME Aluminum 3M settled at $2,595.50/mt, up $299.50/mt on the week.

Aluminum prices were up this week. This has caused the forward curve to shift vertically higher by approximately $300/mt. It remains in contango, meaning that nearby prices are lower than forward prices. Aluminum consumers concerned about increasing prices might consider hedging future needs by buying swaps or call options. End-users might consider strategies that use only swaps or options or a combination of both, depending on risk tolerance. The aluminum market has sufficient liquidity to use swaps and options. Please contact AEGIS for specific strategies that fit your operations.

Midwest Premium

Prompt month CME MWP last settled at 25.0¢/lb this week.

The CME Midwest Premium market is in contango through March 2023 but then largely goes flat for the remainder of this year. 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 $9,185.50/mt, up $596/mt on the week.

Compared to last Friday, LME Copper's forward curve has shifted higher by about $600/mt. The forward curve is now relatively flat throughout 2023 but becomes backwardated in 2024 and beyond. 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 $26,795/mt, down $1,284/mt on the week.

As prices were down this week, nickel’s forward curve has also shifted vertically lower, by about $1,200/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 $725/T, down $5/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.