Good morning,
Regardless of any discourse around current s&ds the fact of the matter is that it has been the macro which drove the price gains and then the recent correction. Therefore, this afternoon’s US CPI data followed by the FOMC rates decision but crucially the subsequent commentary from the Fed’s Powell is set to determine how risk is subsequently deployed. That or whether we are about to experience 2-3 months of depressed choppy price action!
Prior to that, however, our price having corrected so far, we beginning to look a little oversold and a chart of the relevant BCOM industrial metals and energy subindices shows its RSI at levels last seen August 2023. That down to our recent long liquidation and energies recovery (stocks drawing, US reserve rebuild).
As we head towards next Monday’s pricing cash for 3rd Wednesday and Shanghai prepares for its June expiry we note those onshore spreads going bid. That likely the result of some arbitrage shorts having to roll. Indeed we have commented on the manner in which those windows have moved. The arb remains physically closed but has improved substantially since the collapse post Russian sanctions announcements and the outright price peaks.
So this the 4th day of the official 5 day index roll window and we kick off with most metals in the black. Volumes running down against average across the 3 major metals BUT since 8am it really stands out and suggests really muted CTA flows in the market this morning.
Finally complete with TIN which stalls into a down trend from the 20th May $35,355 peak as well as its 21 day ma at $33,047. The one metal to have already achieved all its average trading ranges today. This thanks to supply concerns with onshore stocks now declining. And herewith the first metal to really benefit from AI with the size of its input and recent price gains less impactful to the consumer.
Complete with the news that EU to impose additional Tariffs on EV imports from China as much as 38.1%.
Price performance at cob 11th June 2024:
Options Summary
Yesterday’s activity was all centred around aluminium with a significant amount of puts being sold.
This ties in with key support close at $2500 on the chart. Overall, around 6000 lots of puts were sold in aug/sep $2350-2400 bucket.
On the back of this we are able to offer topsides out for anyone looking to buy the dip.
In copper, the risk reversal was under extreme pressure with front end riskies trading 2% under valuation ($9000 v $10500).
While the market is getting confident we are close to the bottom of the range in copper, it doesn’t make sense to be short puts in the front of the curve:
1) given around 45k of comex length still sits in the market that remains vulnerable over the summer,
2) the puts carry particularly poorly from a gamma theta perspective. One could argue we are not ready to make new highs in copper given the lack of physical restocking out of China so far (one might expect the likes of the state Grid to be very active between $9200-9500usd) Onshore stocks continue to build, as do LME stocks, and therefore we could continue to consolidate in the $9500-10500 range over summer.
Risk tonight on the FOMC if the fed dots show 1 cut only for the balance of this year (expected to be 2 still), and US CPI this afternoon will guide the chairman in the conference later. We like owning leveraged call spreads in copper to take advantage of these dynamics.
Example: buy Oct24 $10250/$11000 call spread 1x1.5 for 80usd/mt
OCO make it zero cost selling 0.5x 9000p
In nickel the risk reversal was beginning to come under pressure as call spreads were trying to be executed in the market, but the whole market was offered for calls.
If you want to take the other side, buy a sep $20000/$23000 call spread for $325usd/mt (ref $18,100 on 3m).
Ali
- Light turnover this morning – running down 33% compared to 20d average.
- There are some discussions around ali alloy substitution for copper cable. And now the suggestion is that replacing copper with ali is set to become a national strategy onshore with China’s Ministry of Industry and Information Technology the driver. Its national industry standard “Residential Building Electrical Design Code” part of the Ministry of Housing and Urban-Rural Development says aluminium alloy has the same status as copper core cables. Whilst China’s National Energy Administration has organized a formulation of the “Aluminium Alloy Cable Industry Standard”. Lest we forget we have the NPC 3rd plenum on 3rd July.
- Copper / Ali ratio and price action looks akin to mid April as as prev alluded to. Now running into 21 dayer which could provide some resis. As should the 3.9000 area
- SMM reported that some alumina factories in Shanxi and Henan entered the stage of resuming production recently, the operating rate of alumina has risen. However, due to the fact that domestic mines have not yet resumed production on a large scale, the short-term increase in alumina supply is limited. On the demand side, the steady progress of resuming production in Yunnan and the announcement of the electrification of the Inner Mongolia Huayun Phase III project have released demand optimism. Onshore alumina price managed to trade higher overnight.
- LME ali continues to see a long liquidation prog since 3rd June but the net combined reading flipped to positive territory yesterday with a light demand reading.
- Shanghai aggregate open interest down 9.8k lots or 1.7%. Long liquidation continues for another session.
- LME on warrant stocks seeing a 11.7kt stock draws and SHFE on warrant seeing a minimal withdraw as well. COMEX inventory instead has been flatlining.
- Looking at aluminum downstream producers’ operating rate in May, only China ali ingot producer operating rate seeing a decent increase to 95.06% from the low in February at 92.9%. Then the rest of the ali profile, ali alloy and ali wires producers operating rate declined slightly.
- Shanghai June July spread remain in contango, settled at 40 contango.
- Daily price has touched rising trend line from the $2177 low on 28th February with the $2508 low from 13th May as we filled the post Russian sanctions gap next support.
- Then $2475 represents 50% retrace of this year’s range.
- Resistance into $2585/2600.
Copper
- Reuters on wires reported that BHP extend contract negotiations with Spence Mine workers union in Chile, delaying a potential strike. Escondida unions on Monday presented their wage proposals to management whom have until 21st June to respond.
- LME net long continues its liquidation having reached its peak back on 22nd May but yesterday saw its net combined reading flip back to positive territory with a minimal demand reading.
- Shanghai aggregate open interest up 7.2k lots or 1.3% after 3 consec declines.
- Both LME and SHFE on warrant seeing small builds whilst COMEX copper inventory declined further and now total at 11.8kt.
- Leverage fund’s net dollar position seeing continuous long liquidation since 3rd May. However, US dollar remained fairly strong which weighing on us.
- Yangshan premium has been unchanged at -$6 whilst China 99.5% spot premium improved further to -30 from the previous low on 21st May at -340.
- Shanghai June July spread bid to 150 contango this morning, tighten 360 Yuan compared to 22nd May.
- Sideways price action since Friday’s failure and close back below $10k. Support into $9600/25 area.
- Resistance into 8 day ma at $9926.
- The latter level tying in with the 100 hour ma and the downtrend from the $11,104.5 peak.
Nickel
- The outperformer overnight and what catches the eye is the Bloomberg report that the Indonesian government is considering a comprehensive review of its mining permits with the potential for termination for some with rotary kiln electric furnace smelters which produce ferronickel and nickel pig iron.
- And see how Nickel Industries which holds an 80% interest in various Morowali and Weda Pay projects has seen its share price drop to levels last seen at the beginning of April.
- 90% of Indonesia nickel output is in the form of nickel pig iron accounting for 35% of global supply.
- LME/SHFE arb window improved further which still suggests buying LME against selling SHFE.
- Shanghai June July spread bid to 300 back today, tightening from 1040 contango on 7th June.
- Onshore stainless prices traded higher this morning which initially brought some support to nickel prices but failed to hold the gains.
- Then all of the onshore renewable energy equity index get sold off again which is not supportive to nickel prices
- A minimal net short re-established on LME and its net combined reading remained in the negative territory with a lighter supply reading.
- Shanghai aggregate open interest up 0.6k lots or 0.3%, minimal changes.
- SHFE on warrant stocks continued to decline, down to 21.6kt from the recent peak on 3rd June at 23kt. In contrast, LME nickel stocks build further to 81.6kt.
- Last few sessions has seen market consolidate – an MOC offer has been evident first 3 days of index roll window. Shanghai is short. LME has gone flat and is starting to go short.
- Support into $17,500 then $17,250 areas.
- Resistance into $18,360 and the 8 day ma.
Zinc
- Yday 15.8k lots of zinc traded on LME select which has been the largest volume since 15th April at 19.9k lots. As with nickel this roll window has seen a moc offer on zinc.
- LME zinc continues to see a long liquidation prog since 29th May but its net combined reading flipped back yesterday to positive territory.
- Shanghai aggregate open interest down 4.5k lots or 2.3%, long liquidation.
- After yday’s sell off, see how ferrous price managed to bounce back which brings some support to LME zinc prices.
- Both LME and SHFE on warrant stocks seeing further stock draws.
- Shanghai June July spread bid to 5 contango, tightening from 120 contango on 21st May.
- Onshore arb support. Again not open but big improvement.
- Support into $2700/25.
- Resistance into 8 day ma at $2856.
Lead
- Turnover is pretty much running in line with the 20d average. A $28 intraday range traded so far which has not achieved any of its ATRs yet. MOC lending interests in the market.
- Onshore arb window has been improved a lot but shut physically still. This could potentially bring LME buying against SHFE selling.
- That window aided by the fact LME sees another stock build.
- LME lead now liquidated to flat since 28th May and the net combined reading remained in the negative territory with a lighter supply reading yday than Monday.
- Shanghai aggregate open interest up 3.0k lots or 2.1% for the 2nd consec session, increased to 149.7k lots.
- Both exchanges seeing stock builds and especially LME on warrant stocks.
- Shanghai June July bid to 90 back, tightening from 25 back on 11th June.
- Lead also looks to be coming under some pressure on a RV basis against zinc. That switch having troughed at $567.5 at cob 7th June. Last at $639.
- Support into the 200 day ma at $2145. $2135 represents the 61.8% retrace of the YTD range. Then we have the $2122.5 low from 9th April.
- Resistance into $2200/15 and its 8 day ma.
Macro
- 12:00hrs MBA Mortgage Applications
- 13:30hrs CPIs
- 19:00hrs FOMC Rate Decision
LME Stocks
Shanghai On Warrant Stocks
* For indicative purposes only, as at 09:45 UK time. Please contact the desk for live pricing
