LME Week met­als’ puz­zle is how to trade a trade war

Gulf Times Business - - BUSINESS - By Andy Home Andy Home is a colum­nist for Reuters. The views ex­pressed are those of the au­thor.

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.

Traders re­act on the trad­ing floor of the open out­cry pit at the Lon­don Metal Ex­change. The in­dus­trial met­als traded on the LME have found them­selves at the heart of the es­ca­lat­ing trade ten­sions be­tween the United States and China.

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