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LME Week metals’ puzzle is how to trade a trade war
Donald Trump didn’t make it to LME Week, the annual jamboree of the global metals trading community. But the US president was the hot topic at the myriad seminars, cocktail parties and private meetings across London this week.
The industrial metals traded on the London Metal Exchange (LME) have found themselves at the heart of the escalating trade tensions between the United States and China.
Physical supply chains have been stressed by tariffs and, in the case of aluminium, by US sanctions against Russian producer Rusal.
Futures prices have been rocked by waves of speculative selling since the first round of trade tariffs was announced in June. The tension between macro doom and micro strength in markets such as copper has become extreme.
Chile’s mining minister, Baldo Prokurica, summed up the views of many this week when he said: “Were it not for the trade war between the US and China, we would have a much higher copper price.” The trade war, however, cannot be wished away. Indeed, it shows every sign of intensifying in the short term.
The big question for the metals industry coming out of this year’s LME Week is how to trade that war.
The aluminium market has been weaponised this year, creating chaos in a traditionally super-efficient physical supply chain.
April’s US sanctions against Oleg Deripaska and his Rusal empire ricocheted in multiple unexpected ways, at one stage threatening the closure of Western European smelters.
Aluminium along with steel was then used to fire the opening salvo in the trade war as the United States imposed 10% import tariffs on national security grounds.
China’s first retaliatory response included a 25% tariff on imports of aluminium scrap from the United States.
That, according to CRU’s Greg Wittbecker, speaking at the research house’s Tuesday seminar, has “killed” the flow of scrap between the two countries.
China imported 620,000 tonnes of US material last year.
The back-up effect in the United States has been a collapse in the value of scrap relative to primary aluminium, according to Wittbecker. If you’re in the automotive scrap business, you’re trading like it’s the Global Financial Crisis of 2008-2009.
The scrap link in the aluminium supply chain is partly broken. Other parts of the chain are rapidly shifting shape as buyers collectively de-risk and rethink security of supply. Everybody expects the sanctions against Rusal to be lifted some time between the US mid-term elections on November 6 and the extended deadline of November 12.
The aluminium price certainly thinks so. At a current $2,040 per tonne, it is almost exactly where it was before sanctions sent it rocketing to a 7-year high of $2,718. However, the removal of sanctions will not change the hostile political landscape between the United States and Russia.
Russian aluminium carries a new political risk going forwards.
Which is why Japanese buyers have been turning away from Russia towards India this year, imports from that country doubling in the first eight months.
And why Rusal itself is looking to expand its sales and marketing presence in China. It’s not just the aluminium supply change that is having to adapt to the new reality of politicised markets.
Chile’s Codelco, the world’s largest copper producer, and China’s state-owned Minmetals, are looking to transform their current annual supply contract to a rolling three-year “evergreen” arrangement.
Supply security concerns are combining with the metals industry’s growing focus on sustainability to change physical producer-buyer relationships.
In the metals futures market the trade war impact has come in the form of waves of fund selling.
The LME base metals have been trapped in a bear tariff narrative of dollar strength and weakened growth in China, a double-whammy of bad news for the likes of copper. The LME base metals index slumped by 19% between June and September.
It has since stabilised and just about every metals analyst thinks the sell-off has gone too far and it is time for a fundamentals fight-back. “Base metals are pricing in near a worst-case scenario on global growth,” JPMorgan’s Natasha Kaneva told the LME’s Monday Seminar.
The copper price, according to CRU’s Vanessa Davidson, has been “driven by investor positioning not fundamentals”. Zinc, agreed Macquarie Capital’s Vivienne Lloyd, “has been beaten up the most” but “we like it nearby — it’s a really tight metal situation.”
And everyone still likes nickel, even if it has lost some of its recent electric-vehicle lustre as it too has succumbed to the broader sell-off.
This tension between robust internal supply-demand dynamics and investors’ negative view of base metals in the current tariff climate is currently playing out in LME time-spread tightness.