LONDON (Reuters) - “Near the bottom or worse to come?”
The title of CRU Group’s panel discussion last Tuesday neatly sums up the downbeat mood of this year’s London Metal Exchange (LME) Week, the annual gathering of the world’s metals industry.
This time last year the cocktail party chatter was all about President Trump and the escalating trade war with China.
One year on and the Sino-U.S. stand-off is still tantalisingly suspended between deal/no-deal (delete according to personal preference).
Industrial metal markets have paid the price for this year-long showdown. Political deadlock has accentuated China’s manufacturing slowdown and further depressed an already struggling global automotive sector.
Copper, aluminium, zinc and lead are all expected to experience a demand contraction this year, according to CRU. The sector hasn’t seen this sort of synchronised downturn since the dark days of the Global Financial Crisis.
At least there was nickel to provide a bit of bullish frisson to this week’s activities. The break-out performer from a flat-lining base metals pack was the hottest topic in town.
Analysts came into LME Week in downbeat mood. A Reuters base metals poll earlier this month revealed a 6% downgrade to the consensus copper price forecast since the last poll in July.
Sliding purchasing managers indices (PMI) have highlighted the geographical spread of manufacturing weakness. The latest official reading from China marks the sixth consecutive month of falling factory activity.
The question, as CRU pointed out, is whether there is worse to come.
The research house’s base case answer is no but don’t get too excited. It’s forecasting global industrial production growth to recover from 1.5% this year to 2.2% in 2020 but with a warning of “persistently lower growth rates” ahead relative to the last couple of years.
The even more alarming possibility is that things get worse if manufacturing weakness morphs into broader economic recession, particularly in the United States. CRU assesses the possibility at 40%. Interestingly, the audience pretty much agreed in the form of an electronic poll.
For now, though, the hopeful consensus is that things will indeed get better, particularly if, as Shanghai Metal Market’s Ian Roper suggested, Beijing targets its next round of stimulus at battered sectors such as the automotive industry.
“We are cautiously optimistic for metals next year”, Caroline Bain, chief commodities economist at Capital Economics, told the LME’s Monday seminar.
Less so for zinc, which she was specifically talking about. Both zinc and lead are expected to transition from supply shortfall to surplus next year, according to the International Lead and Zinc Study Group.
Another text-book example of bad commodity timing with new supply hitting the market just when it’s not needed.
Aluminium’s timing is looking even worse.
CRU’s expecting Chinese production to surge by 7% next year. Production outside of China is also going to ramp up at a historically fast rate, Harbor Aluminium’s Jorge Vazquez told the LME seminar. He forecast a weak rally over the first part of next year before “more weakness” in the second half.
The metals trading community doesn’t do recessions very well so fizzing nickel has this week served as a welcome distraction for Trump-weary traders.
As to quite what is going on, however, “there are more conspiracy theories than dinner attendees,” to quote Malcolm Freeman, head of Kingdom Futures.
Here’s the lowdown.
The LME nickel price has risen 54% since the start of the year. By way of comparison, the next best performing base metal contract, lead, is up by just 11%, while bellwether copper is flat.
Nickel has experienced a supply shock in the form of an accelerated ban on the export of Indonesian ore, a key raw material for Chinese stainless steel makers.
The ban was brought forward from 2022 to the start of next year and, just to wake everyone up at the start of LME Week, the Indonesians said on Monday it would start immediately. But then it turns out it’s not the real ban, just a temporary suspension. Continue to expect the unexpected when it comes to Indonesian minerals policy.
Meanwhile, LME stocks of nickel are disappearing. They have plunged by 100,000 tonnes since the middle of September. At 30,738 tonnes, “live” stocks are at levels not seen since 2007.
It’s an open secret that the metal is being taken up by China’s Tsingshan Group, the great disruptor of the stainless steel industry and possibly now of the nickel market.
Just to add a dash of regulatory spice to this heady cocktail is an exchange probe into just what has been going on.
No-one has a clue as to how this unfolding drama will play out, but everyone, not just nickel traders, is waiting with bated breath for the next installment.
Low stocks are a specific problem for the LME’s nickel contract right now but the exchange is worried there’s a more structural issue with low inventory across many of its contracts.
The exchange announced this morning another revision to its already labyrinthine rules around warehousing with a view to incentivising more stock into the system and keeping it there.
Changes to warehouse load-out economics and so-called “ever-green” rent deals will be introduced next February. Both excite strong emotions among that part of the market involved in stocks financing.
Non-specialists might be forgiven for glazing over at the LME’s proposal to adjust “queue-based rent capping” from 50 to 80 days in phases over a nine-month period.
The whole market, by contrast, should be interested in the exchange’s requirement, also from next February, that off-market stocks be reported.
Or at least those that are sitting in LME-registered sheds or being stored under a contract referencing the exchange.
The tactic is the same used successfully to capture revenue from over-the-counter trading that references LME prices.
The aim is to “increase transparency and (enable) the market to trade on the basis of a more holistic view of metal availability, even if core warrant stock is limited”.
The opacity around reported stock movements is, the exchange feels, actively deterring participation from parts of the potential trading universe, particularly larger investment players.
The move won’t sit well with many of the market’s bigger physical players but, if it works, a bit more statistical light on stealth stocks will be welcomed by just about everyone else.
In terms of price outlook, the metals markets will take any sort of light at all.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Louise Heavens