And YES we are higher…..
Base metals price performance at cob 3rd May 2024.
Ali and copper under pressure last week the former the result of it having encountered not only gamma long liquidation into last Wednesday’s May expiry but primarily the result of a heavy producer offer having emerged above $2600. Tin’s underperformance, as in copper’s case, the result of longs reducing. This metal still up over 25% ytd on the back of the AI drive and chip requirements. Copper also having built a large spec long pretty much across all 3 exchanges. But that also apparently coming under some sell pressure – the result of subtle shifts in the financial markets. We do not necessarily subscribe to that opinion but with the intention of observing, see how gold in yellow led the recent retracement move. Copper in green then followed. But there a case that some of the move in the US rates (2s in white) also contributed to the sell off. Ignoring all the chatter around lack of apparent demand and imminent Chinese smelter deliveries on to the LME!
Yet Friday morning saw a lack of any meaningful CTA sell programs emerge even after Thursday’s poor technical closes. Indeed, rather telling how vol was under pressure for the majority of last week amid largely contracting ranges and a decline in volume in the absence of China. Not many prepared to bet on heavy moves to the downside. Rather the bearish strategies we see expressed are windows and ratio put spreads – low cost. Vol selling. Not screaming slam dunk we are going to crash so to speak.
A Bloomberg chart of the rolling 2nd month LME at the monies as well as comex copper July at the monies as well as the vix in white. IF the market was betting on big downside then we would be seeing money bet on it.
Our own Ryan Fitzmaurice published his weekly note today analysing money flows (link attached) which well reminds us of that shift in real money flow = the evidence of that bid seen into moc on both 30th April and 1st May. Broad based commodity ETFs have seen inflows for 7 consecutive weeks now amounting to $1.88 billion. Whilst our base saw a pitiful inflow this is a theme which remains and which shows no signs of abating.
https://app.neon.markets/insights/browse/article/66380b74300a6c0f30458b5e
And regardless of that rate’s – will he won’t he - endless discussion there is going to remain an attraction to own commodities given 1) their underperformance versus stock markets on a long term basis (see Bloomberg ratio of BCOM versus Dow) 2) ESG – 3 simple letters.
But you think about that ESG move and whilst we are seeing supply led price responses in the absence of onshore Chinese physical demand in the here and now, our metals have outperformed quarter to date (up 13.2% at Friday’s settle) versus energy down 1.1%. That BCOM metals subindex only a smidgeon off the precious metals sub index outperformance ytd (+10.89% versus +10.96%).
A Bloomberg chart of the ratio of the metals vs energies BCOM sub indices.
But which can also be illustrated using one of Guy Wolf’s analytical charts on Neon. Risk premia RV position estimates which have had such a heavy impact across the landscape over the past 3+ years where length in energies such as RBOB gasoline but particularly the two crude contracts has been cut in tandem with length being established on the likes of copper, gold and zinc.
Guy’s channel becoming more interactive and providing our client base with ability to look back historically at spread and outright positioning and which now also breaks down the constituents of that spec positioning.
Of course, there remain valid concerns outside positioning. Chinese property and you can see today the Shanghai property index open strong only to then decline to close on the lows and up only tiny on the session.
But China’s politburo meeting on 24th April signalled further fiscal and monetary support as well as renewed efforts to stabilise the housing economy - some suggesting social housing will be used as a means to absorb those other losses. Chengdu, the capital of Sichuan province, having announced a relaxation on home buying curbs early last week, other tier 1 cities are expected to follow suit. John Lamm of UBS who foresaw some of the onshore property issues sounding a more positive line. Other analysts seeing this structural shift in stimulus as being more cohesive and coordinated in its response.
A Bloomberg chart of the Hang Seng index shows the bounce since the 19th April retracement. Its daily RSI now into overbought territory akin to January 2023 or January/February 2021. But amid our metals markets chatter around lack of China demand, money has been betting on a stronger economic recovery judging by this stock index.
Although Marex Global Risk Index has been correcting driven initially lower by its psychology index in blue. But respecting this index, it does present a more cautionary tone.
With the LME shut today we note comex copper, ali and the onshore metals pricing rallying in London’s absence.
London returns tomorrow to the start of the 5 day index roll window. Price being king we see no signs yet of any shift in our outlook. Consolidation yes. But we remain positive on the back of that shift in money flow primarily. It will be as we approach the US general election in November where trade tensions and as Chinese policy support dissipates where we see another real threat to the current status.
See a Bloomberg chart of Europe’s stocks resources index and how that held the breakup area on this last week’s correction.
Ali
- Price rallying on Shanghai and CME today in LME’s absence.
- Indeed, the last time the June contract on Shanghai rallied north of 20,700 the LME price was closer to $2650 than the figure. Although we note Shanghai price starting to drop…
- LME has recently encountered a decent producer offer above $2600. We see the best representation of that fact by posting a Bloomberg chart of the 3 months price action in blue compared to the forward outright Dec 2027 price which is still well below the December 2023 peak.
- Although there is also some big options open interest which can tie up the market.
- June $2600s x 5.9k lots. To the topside the June $2700s x 7.3k and to the down the $2400s x 10.1k.
- These in themselves provide a lot of gamma let alone all the other strikes.
- The 6 month 25 delta skew remains call bid albeit at 1.61% off the recent peak of 1.99% registered 16th April.
- LME saw big rewarrant – material which had previously been cancelled following Russian sanction news.
- Shanghai weekly deliverable drawing small.
- CME which have been drawing back to 33kt from 45.9kt early March.
- That stock re-warranting along with options expiry resulting in LME cash to 3s easing to $40.69c from $6.6c on the 30th April.
- Ali might not have the supply story that say copper has. But it has the demand. China’s National Energy Administration only recently highlighting the still strong growth rates in photovaltic panels – 220 GW this year from 217 GW solar panel installation in 2023.
- And that probably explains why Shanghai aggregate open interest which declined into the holidays has today expanded. From 603.5k lots at cob 30th April to 623.3k lots as we write. It having peaked at 723.5k lots on 12th April.
- Support on LME into $2520/5 area of lows from back end of last week. Then $2502 and the 50% retrace taking move from $2276 low 27th March to $2728 peak.
- See how price held the $2512/17 gap created the weekend the Russian sanction news resulted in that big spike.
- Resistance into $2600/25 then $2700/25.
Copper
- A similar story on copper which saw an initial decline on comex give way to a sharp rally which should see LME price at around $10,050 basis current levels.
- Stretched positioning and moves in rates market apparently all contributing to the recent correction although we noted moves in the spreads markets on London and New York symptomatic of more of that arbitrage spread pain. Comex bid and London offered as traders get out of their short CME / long London position established into the comex money bid. In other words the market still finds shorts.
- But copper is one market ALL about the tight supply situation. Recent hostile bids for Anglo telling us : we cannot build mines quick enough to satisfy anticipated demand that is coming. So we need to buy.
- Codelco having issues with grades and expansions. Zambia having power issues as the result of droughts. Congo from uranium heavy shipments, those same potential power shortages as well as the unwelcome border hostility with neighbouring Rwanda and Isis.
- PWC on Monday release that over half of the world’s copper supplies by 2050 will be in areas deemed at significant (high or extreme) risk of drought.
- Panama ‘s trade minister allegedly barring First Quantum from extracting copper during the closure of its mine. Even if business friendly frontrunner Jose Raul Molino wins the national election Cobre Panama’s reopening is likely to take time and longer than most had anticipated at outset of this year.
- Arubis share price having taken a plunge on the back of reports from the likes of UBS that concentrate shortages are set to remain – although recovering somewhat today. That said see the heavier volume on Friday’s collapse.
- There has been much chatter around the potential for Chinese smelters to make stock deliveries on to the LME. We suspect 100kt a rich figure although there seems to be the potential for something in the order of 40kt.
- Note, however, that onshore premiums showing some signs of a recovery. Tiny but off their lows.
- Stocks drawing on the CME having contributed to the spread bid there.
- LME on warrant at 93.4kt up tiny since the recent 18th April trough of 90.4kt.
- Shanghai weekly 288kt just off the recent peak of 300kt registered 19th April.
- LME cash to 3s out to $119.87c from $71.6c on the 29th April.
- The $10ks remain the most significant options strike – June x 3.9k lots. July x 2.7k. Sep x 1.9k. Dec x 6.2k.
- No change in the skew to calls. 6 month 25 deltas at 3.82% calls over from 3.92% peak from 16th April but no real shift here even amid the correction.
- Basis today’s gains LME price should be back into the lower line of that rising trenc channel we broke down through on Wednesday. That shows $10,094.
- Resistance then into $10,165-10,200 area. Then target $10,400/500 and that area from April 2022.
- Support now $9660/9705 below.
Nickel
- Shanghai’s open and whilst price has rallied this afternoon we don’t see it as materially impacting the LME nickel price. Its higher but not like say copper or ali.
- Maybe $19,250/300 at current levels.
- Outside tin, nickel has been the best performer of the complex year to date up 15.9% at Friday’s close.
- This the result of a short covering program which sees the spec position as essentially flat. This the exception of the complex with all the other metals showing at least some length as having been established.
- Stocks continue to build on both exchanges.
- LME cash to 3s out to $189.97c from $150.26c on the 24th April.
- A steady onshore price though even amid those stock inflows and with the stainless price showing signs of potentially turning lower.
- But for all the bearish increasing supply chatter there remains a 3.71% skew to calls looking at the 6 month 25 deltas. This having peaked at 4.19% on the 19th April.
- The $20ks still the lumpy open interest in the front with June and July showing 1.8k and 1.6k respectively.
- To the downside the June $18ks x 2k lots.
- I would have thought one could make an argument for ESG investment into nickel and see how those onshore renewable names have been rallying since 22nd-25th April.
- Thursday’s dip saw price hold and create 3rd point of rising trend line taking low of $16,540 on 28th March.
- Resistance into $19,390-460 highs from 26/29th April.
- Above there $19,750/850 area although top end of rising trend channel comes in around $20,680 and will there be negative whip through $20k?
Zinc
- At current Shanghai trading levels LME shows around $2925 so a minor increase.
- Following recent adjustments from the likes of ILZSG to their surplus forecasts – from 365kt in 2024 they now see only 50kt. This week saw announcement first from Nyrstar that it would be restarting its Budel smelter at reduced capacity from 13th May. Then Friday Boliden announced it would be restarting its Tara zinc mine. This Europe’s largest zinc mine and produced 300kt of conc pa. Note its restart in 3Q24 is actually around 6 months than previously envisaged.
- Zinc facing a similar situation to copper. A concentrate supply shortage.
- China zinc ingot inventory at port remains at 48kt still running fairly low compared to previous years.
- Although exchange stocks do not show that stress yet.
- Shanghai weekly yet to draw meaningfully last at 129kt having risen from 22.6kt in Jan to the 19th April peak of 132kt.
- Likewise LME on warrant stocks at 223kt only just off the 20th Feb peak of 240kt.
- LME cash to 3s out to $30.37c from $9.83c on the 29th April.
- But steel and ferrous having been more supportive even if the rally in SGX iron ore is showing signs of pausing.
- Not much of a skew in the 6 month 25 deltas albeit still to calls – 0.77% at Friday’s settlement off the 0.92% peak registered on 23rd April.
- Not much around in the way of options oi. The June $2900s x 1.5k lots.
- You need to look lower for anything else meaningful and say the $2600s or the $2700s.
- Support into 21 day ma at $2812 now as well as $2830/40 lows from last week.
- Below there the $2758 low from 23rd April.
- Resistance into $2975 and 30th April peak then $3017 and the 61.8% retrace taking move from $3512 peak to $2215 trough.
- 200 week ma comes in at $2929 and a breach of that will be interesting to see if we start to trigger some longer term buy signals.
Lead
- June Shanghai contract made new highs and shows LME could be into $2250/75 area.
- One of the few metals to have seen a bid for downsides in the options space.
- June $2100 puts show 1.8k lots of open interest. At current levels the June $2200s x 1.6k.
- This also reflected in its 6 months 25 delta risk reversals which show a skew to puts = only 0.3% but ALL other metals see a skew to the calls.
- Lead seen as toxic. We have even heard some suggest ESG investors less keen to invest in a metals basket with lead’s involvement.
- Although nickel’s involvement by the same metric at least currently…
- Shanghai weekly deliverable of 49.5kt down from 60.2kt on 12th April.
- LME on warrant at 160kt up from 141kt on 24th April but well off the 3rd April peak of 265kt.
- LME cash to 3s $37.93c from $43.29c on the 2nd May.
- Resistance into $2235/50. Then the $2300 area.
- Support $2175/85 then $2135.
