Once in a Lifetime.
We sit in an environment the like which of which appears but once every few decades. We have a backdrop which is positive risk assets globally. We also have a demand environment the likes we have not seen since the outset of this century when China was industrializing. The world’s moves to decarbonize, the development of AI and the power needs that generates not to mention this all coming at a time when supply is becoming increasingly challenging. Diminishing and deteriorating grades the cost of which to improve and increase production more challenging from a cost and social governance perspective. Resource nationalisation and the increasing weaponisation of those commodities cannot but engender a higher price environment in those things that we trade.
First, we would touch on China’s recent property supportive measures – last week’s removal of the floor on mortgage rates and the clear plans for local government and state backed ventures to acquire homes from those in distress to convert them into affordable housing. From a steel perspective one wants to see the glut of inventory be reduced. But 1) see the power in the rally on the Shanghai Property Index.
And 2) Individual property names onshore have been rallying since 22nd April.
Granted the RSI looks overbought on the daily Shanghai Property Index but the salient point being that it has been China’s property sector which so many reason as being the portent of price disappointment, yet these say otherwise.
Moreover, IF the social housing solution is coming then that will inevitably involve white goods at a time when downstream has gone through an 18 month period of destocking which is now complete. ALL LIVING HAND TO MOUTH at a time when there is absolutely NO supply slack in the chain. That is why we can talk about the stretched long positioning now on so many metals in our space yet price action – outright, spreads and options – all of late scream that this is an environment where people keep getting caught short. Remember we now have sanctions on Russian metal which means moving metal from one exchange to another might not now be possible. Likewise power outages, logistic issues, these all leave synthetic shorts on exchange.
So, China is pro-growth. That is the tone we have gotten from the recent Politburo meeting recently and ahead of the July congress. As for sanction moves and the economic decoupling not to mention geopolitical shifts in the medium term, we are facing demand from the world’s governments as they look to build their military capabilities in the here and now. Regardless of any potential future economic hit, in the present we are facing more demand surprises. And it is these which are driving the substantial money flows into our space. Let’s not pretend that the AI power demands have not come as anything but a shock to most! Indeed, as someone pointed out to me recently when you consider current $2-2.5 trillion market capitalization of Nvidia (probably the purest form of exposure the money has taken to all things AI), for only 1% of that to shift out we are talking about $20-25 billion. That was particularly prescient given this week 13F filings showed that legendary investor Stanley Druckenmiller’s Duquense family office had indeed reduced his position in Nvidia by 72%. Separately the office almost tripled its position in Freeport McMoran. That probably your purest copper play. Again, the takeaway being that outsiders are coming into our space and a major contributor to the price gains.
Courtesy of my colleague Ryan Fitzmaurice.
Attach a link to his last Monday’s weekly commodity ETF flow report.
https://app.neon.markets/insights/browse/article/66415b55300a6c415e458e1d
So, the wider money is shifting into hard assets as an inflation protection – think how Jamie Dimon commented this week that a “lot of inflationary forces are in front of us”. He cited the green economy, militarization, infrastructure spending and large fiscal deficits”. This writer’s view that that last point starts to impact our space into 4Q24 and we get into the US population’s most divisive presidential election in history. But right now the European Stoxx Resource Index and its move to March 2023 levels testament to this shift.
On the wires Mexico’s power grid operator Cencace declaring a state of alert on Saturday as temperatures in some states hit 45 degrees. Texas recently. All telling us governments need to spend.
Flows wise our complex has come out of the official index roll window and yet this past week has seen a steady moc bid from Stateside. We had that consolidation the prior week, paused and now up we went again. Likewise expanding open interest on Shanghai screams this is not just about a western money bid. Financial speculators there betting on price gains. State owned buyers in the state grid etc are all likely underhedged. For let us not forget. We are in a month which is traditionally seen as “Sell in May and go away”.
Price performance at cob 17th May 2024.
So here we lie having already made such substantive gains. A grid showing 12 monthly average trading ranges to illustrate how rampant the moves have become.
What is there to say? Inevitably we are due some sort of correction which will shake out the low hanging fruit and cause many to catch sharp breath. But look at the ratio of the Bloomberg Commodity Index to the Dow Jones. Since 23rd February’s nadir commodities are beginning to outperform the stock market.
We can see from charts of the 2nd month rolling at the monies how volatility has picked up on this week’s price gains and especially on the likes of nickel, copper and to a lesser extent ali.
I compare the current environment to that seen 2004/2008. So attach a chart of the LME copper 3s price and LMEX index to see how their current price action compares to back then…
This week from the USA we have:
22nd May : MBA Mortgage Applications, Existing Home Sales, FOMC minutes.
23rd May : Initial Jobless Claims. PMI. New Home Sales.
24th May : Durable Goods. University of Mich Sentiment.
From China and we arrive tomorrow to their having set the 1 and 5 year loan prime rates.
Ali
- The focus has been on the producer offer which has re-emerged on the move back above $2600. But noticeably the Chinese bid has also returned with a vengeance resulting in Shanghai aggregate open interest expanding to 666.8k lots at the close of Friday’s evening session from 596.7k lots at Wednesday morning’s close when LME price was $2565.50.
- On 10th April the Shanghai aggregate open interest peaked at 709.2k lots.
- And it is worth reminding ourselves that it was onshore demand and specifically 1.5mt of consumption from China’s solar industry which prevented the price break down in 2023 which so many people had anticipated.
- A chart of some of the onshore and western mining names attests to aluminium’s positive demand outlook.
- The announcement of Trimet restarts in Europe and China’s increasing production in April should also be seen as signs that demand is expected to recover.
- According to a report released by the National Bureau of Statistics, China's April primary aluminum (electrolytic aluminum) output was 3.58 million tons, up 7.2% year on year. In April, due to the improvement of power supply in Yunnan Province and the high aluminum price, the second round of production resumption of local smelters was successively launched.
- The LME on warrant stocks initially saw further builds last week after Friday’s 561kt increase. Those peaking at 926kt on Tuesday from the recent low of 131kt on 1st May. Before cancellations saw these drop to 641kt Friday morning.
- We are of the opinion that these stock flows are less meaningful given the warranting would have likely be the result of rent deals. The subsequent cancellations by financiers amid wide contangos.
- Shanghai weekly deliverable and CME having seen minimal stock movements last week.
- Weekly China aluminum ingot social inventory continues to see stock draws, down 4.0% to 747 kt. Similarly stock draws seeing in onshore aluminum spot inventory.
- Given it was a topic Ian Roper discussed in 2023 its worth noting how the emissions market has been in recovery mode. Remember aluminium benefits from ESG moves.
- To the topside the $2700s an interesting strike with 6.1k lots of June open and the Seps 5k.
- Looking at a volume profile for the month the largest exchange went down into the $2550 area. A vwap in May of $2562.
- So no heavy exchange above $2600 really yet.
- Although a rolling 1st to 3rd Dec chart shows what is currently Dec24-26 has tightened from $130 contango on the 14th May to $80.71c at Friday’s close.
- LME cash to 3s still in the doldrums settling at $51.77c in from $54.88c at its widest settle on 14th May.
- Weekly chart pattern is most bullish in that price has filled the post Russian sanctions price gap between $2512/17 and held the 8 week ma at $2527. There lies the big support now.
- Resistance into $2675/2725 a break above which opens up potential test of $2825/50 and the 38.2% retrace taking the $4073.50 high in March 2022 to the $2080 low in Sep 2022.
Copper
- Aside from the news that Duquesne has invested in Freeport what about the news that Sprott Asset Management has filed on behalf of its Physical Copper Trust in plans to provide clients a vehicle to invest and hold all of its assets in physical copper??!!
- African droughts. Resource nationalism in South America amid the growing realisation that Cobre Panama’s restart is going to take longer than most had anticipated. Declining grades in South America. A higher price making it even more expensive to hold metal amid contangoes in the front end of the term structure.
- The recent arb movements so well documented in the press symptomatic of a market caught short. And that spreads are not so low risk in times of s&d stress.
- We use a rolling LME 3s chart versus a July comex prompt to best illustrate how the comex premium over London reared to north of $1000 before easing.
- That resulting in those CME shorts looking to roll their positions. That resulting in the July September spread on comex trading out to $29.25 back on the 14 and 15th May before easing and settling at $8.65 by the end of the week.
- And it was the tailing of this short which likely drove July at the money vol on comex to spike from 22.81% at close 9th May to a peak of 36.66% on the 15th May.
- That settling at 35.85% on Friday.
- Our colleague Tommy Bain published his comments on this on 14th May. Link attached.
- But the important point is that there is not enough metal left in LME warehouses and which is non Russian. Neither Russian metal now sanctioned NOR Chinese brands are eligible for delivery to the USA.
- Nor does this writer think the easing in either that July comex copper premium nor the tightness across July Sep period alleviating as being a sign copper is due a correction. Rather would see recent behaviour as particularly bullish.
- Previous flare ups have been seen once comex has moved into prompt such as that seen in December 2005. This time the tightness has materialized much earlier and so should be respected.
https://app.neon.markets/insights/browse/article/66436f87739d892753fa789d
- CME stocks now down to 20.1kt from 30.9kt on 21st March.
- Shanghai weekly deliverable stocks flatlining – a small increase this week.
- Ditto LME on warrant stocks up to 92.2kt from 89.5kt on 10th May.
- But remember we have just passed through 3rd Wednesday pricing when stock inflows are sometimes seen.
- LME seeing May buck the seasonals. Most likely mirroring 2020 in our view than 2021 when June then saw a 8.6% retracement.
- The $11ks the next big strike to the topside. Dec 24 showing 5.7k lots on that strike.
- A volume profile for the month showing the largest volume bars go through in the $9900 area. The May VWAP $10,123.
- LME cash to 3s into $70.15 contango from $136.65 contango on the 8th May and the tightest settle since October 2023.
- We have recently discussed copper’s correlation with gold. Part of that wider money shift. See how silver breaking $30 this week also symptomatic (money flow into tighter supply, increasing demand picture => sound familiar?)
- We don’t dispute this market is long or that it can retrace sharply at some point.
- Comex commitment of traders at last Tuesday’s settlement showed the managed futures net long at 69.3k lots. The peak on October 2020 having been 92.1k lots.
- Its just when this writer looks at a chart whilst we started off with the 2004-2008 comparison in the opener we look at the price action in 2020 and how its RSI looked similarly overbought and you could argue we still have a long way to run.
- A break of $10,845 all time peak and one can argue for an extension to $11,763.
- The big area of support now coming in at $10k – the 8 week moving average coming in at $9760 testament to how far and fast this thing has run.
Nickel
- A state of emergency in New Caledonia has seen nickel operations out there shutter resulting in around 5-7% of global production now at risk.
- The key being some seeing nickel which had been seen a surplus market in 2024 coming back to balance.
- And the key here is that the market has just really completed covering its short only beginning to go long in the past few weeks when you look at LME exchange data.
- That in stark contrast to the other metals where length as already been established. Moreover onshore feedstock prices have been steady and on the increase.
- Nickel sulphate prices attached but also ore prices.
- Official inventory builds on both exchanges.
- LME cash to 3s easing to $250.25 at Friday’s close from $171.6c on the 10th May and the widest settle since mid February.
- Onshore stainless has not been the driver of this week’s outsize price gains.
- Nor power names onshore. Yes some renewable energy names rallying too but solar companies under pressure (no doubt fears around previous overproduction and tariffs there).
- Rather the moves smelling a market which has seen money inflows via a steady moc bid with the profile of its options space short volatility no doubt.
- June upsides showing some decent open interest - $21ks x 1.3k , $21,500s x 1.6k and $22ks x 2.7k lots.
- 2nd month rolling at the monies up around 7.5% on the week.
- The largest exchange in May going through in the $19,000-$19,500 area.
- Price has rallied through its 200 week ma at $20,856 pausing on Friday into its 100 week ma at $21,441. Price has been below its 100 wee ma since mid May 2023 and its break down through the $24,500 area.
- Resistance into $22,675 above,
- Support now into $20,300 area then $20k.
Zinc
- Regardless of the recent news of the European mine restarts in Tara or Bodel China still faces a current concentrate shortage as seen from its port inventory levels which sit well below their historical average and on their lows.
- Price supported at the margin by increasing power cost – see that surge in nymex nat gas in green.
- Although it was the pick up in ferrous and steel as the result of those property supportive measures onshore which helped zinc to recover to the highs on Friday.
- Shanghai weekly deliverable stock inflows pausing.
- But LME on warrant rising to 236kt from 203kt on the 14th May and challenging the 240kt peak from 19th February.
- Perhaps surprising then that LME cash to 3s tightens to $37.59c from $48.26c settle on the 15th May.
- Don’t look much to the options open interest. Nothing to the topside.
- Price has decisively cleared its 200 week ma at $2937 which now provides support.
- More into is 8 week ma at $2808.
- Resistance into those $3140/50 highs from Feb and March 2023 then the $3512 peak from January 2023.
- Looking at recent RSI action circled on the daily chart and that looks like confirmation of a trending market to me and bullish.
Lead
- The underperformer last week and along with ali year to date.
- Looking at its volume profile for May it’s the one metal where you can argue that the larger turnover is going through the higher end of the range.
- Shanghai weekly deliverable stocks up to 72.9kt from 48.3kt on 26th April. Last November these having peaked at 79.8kt.
- LME on warrant stocks starting to see draws back to 152kt from 167kt on 1st May.
- LME cash to 3s into $48.91c at Friday’s close from $53.02c on 15th May. That its widest settle in years.
- Most interest in the options market having been directionally bearish of late.
- Shanghai agg oi having expanded from 103.8kt on 30th April when price was $2228.50 to 137.7k lots last. Last November the total having peaked at 155.4k lots.
- Friday saw LME price stall ahead of $2310 high from January 2023 above which there is a $2333 high from May 2022. A breach of that opens test of $2400 and likely the $2450/75 area.
- Support now $2250 then the 21 day ma at $2222. Or as my colleagues might say : “a Desmond”.
So we won’t speculate on timing and potential for a pull back which there undoubtedly will be at some point. Its just we believe we are in bull markets. And last week the raging one was back in the house.
