LONDON (Reuters) - It’s been a good couple of months for the Shanghai Futures Exchange (ShFE).
Volumes on its base metals contracts slumped over the first quarter of this year as China went into COVID-19 lockdown and manufacturing activity ground to a near halt.
But trading activity has since been surging as factories return to normal and traders cheer on Beijing’s infrastructure-heavy stimulus boost.
While China celebrates, the rest of the metals world appears far from sure the coronavirus has been beaten.
London Metal Exchange (LME) volumes slumped over the second quarter. So too did activity on the CME copper contract, a bellwether of speculative activity in the industrial metals space.
This sharp drop in trading engagement has coincided with a robust rally in base metals prices, suggesting a lack of buy-in to the recovery story from both industrial and fund players.
The one noticeable exception is aluminium.
Low prices, accumulating stocks and U.S. tariffs have combined to lift trading action across all three base metals exchanges.
The COVID-19 chill on trading activity has switched from China in the first quarter of this year to the rest of the world in the second.
Copper, a favourite metal with investors as a metallic proxy for global economic activity, typifies the first-half pattern.
Doctor Copper had a torrid time at the start of the year, tumbling from a January high of $6,343 per tonne to a March low of $4,371 as the market priced in the lockdown of much of China’s manufacturing sector.
Trading boomed on both the LME and the CME contracts, up 11% and 17% respectively by the end of March relative to 2019.
Activity in Shanghai, by contrast, collapsed by 23% in January and February and despite a March surge as quarantine measures were lifted, first quarter volumes were still 4% off last year’s pace.
But Shanghai’s spring-time exuberance extended through the second quarter with copper volumes up 20% by the end of June and open interest the highest since January.
While Chinese metals trading has bloomed, activity in London and New York has wilted.
LME copper volumes fell by 22% in the second quarter relative to the first, while CME volumes slumped by 29%.
The same loss of trading intensity across the two exchanges suggests both speculative and industrial players have reduced activity as lockdowns followed the coronavirus from east to west.
This pattern of fading trading momentum has played out across most of the LME’s contracts.
Total LME volumes rose by 13% in January-March, not counting so-called “UNA” trades. These, originally introduced as a regulatory stop-gap, have become noticeably less popular since May last year, when the LME started levying a fee on them.
However, as the COVID-19 chill moved from east to west, second-quarter activity noticeably dwindled.
The LME’s average daily volumes fell by 6% year-on-year in April and by another 5% in May before collapsing 17% in June. Year-to-date growth has braked sharply to 1.1% on an average daily basis.
June was one of the quietest months in years.
Hedge funds seem to be playing in other markets, LME broker Marex Spectron noting that “discretionary risk appetite remains cautionary” and “base metals remain largely underinvested.”
Meanwhile, “the trade side of the market is conspicuous by its absence which is hardly surprising,” according to Malcolm Freedom, head of Kingdom Futures brokerage, writing at the end of last week.
The black box algo traders continue to ply their trade but the June slump in LME volumes suggests just about everyone else is biding their time.
ALUMINIUM THE STAND-OUT
Aluminium was the star performer of the first half of the year in terms of trading activity.
Volumes on the Shanghai contract rose by 28% year-on-year after two consecutive years of decline.
LME turnover, meanwhile, rose by 12% in January-June, the strongest growth among the LME base metal contracts and exceeded only by the much smaller steel rebar contract.
London aluminium touched a four-year low of $1,455 per tonne in May, stimulating industrial hedging activity.
Rising volumes also reflect rising inventory.
LME aluminium stocks have surged by 68% from a mid-March low of 967,325 tonnes to 1,625,550. There is a broad analysts consensus that more is probably accumulating in the off-market shadows.
All that aluminium needs to be hedged with the stocks financiers back in business thanks to a healthy contango across the LME aluminium curve and super-low interest rates.
Surplus metal is good for LME volumes, if not necessarily for the price of aluminium.
Meanwhile, aluminium’s fractured physical trading landscape has boosted the CME’s premium contracts.
The United States imposed a 10% tariff on imports in 2018 with exemptions granted to only a handful of countries, including Canada, the largest supplier to the U.S market.
Now it is thinking about re-imposing tariffs on its neighbour, sparking a rally in the premium for Midwest US delivery.
The CME’s Midwest contract saw turnover almost double in the first half of 2020 to the equivalent of 1.65 million tonnes, reflecting this new political uncertainty.
The CME’s European contracts also experienced an explosion in trading activity. First-half volumes on the duty-paid premium contract were up by 175% and those on the duty-unpaid contract by 177% relative to 2019.
Aluminium premium trading appears to have established its home on the CME. The LME’s belated catch-up products saw some early interest after launch in March last year but its U.S. premium contract hasn’t traded since February.
What’s significant about this lack of metals trading appetite is that it has coincided with a sharp rebound in metals prices.
LME copper is currently trading at $6,310 per tonne, having clawed back all the losses of the last five months.
But this appears to be a rally forged primarily in the Chinese market with many players elsewhere standing aside.
As such, out-of-synch metal markets are doing no more than reflecting an out-of-synch world. One in which Chinese economic activity is recovering even while other countries are still battling to control the spread of the virus.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Jane Merriman