LME Weekly Update 23 Jun 2024

Metals ended the week on the back foot. Prices having become more choppy after the recent bout of risk reduction. Half year end Friday. Stocks beginning to show signs of declines onshore. But need more China involvement. 3rd plenum 3rd July.

Published 24 June 2024 amt 03:13 in Global Marex Metals by Marex Global Metals Desk


This Thursday 27th June 2024 the desk will be hosting a call with Ian Roper from Astris Advisory Services:

Topic: The outlook for Chinese demand in H2 2024
 Time: Jun 27, 2024 02:30 PM London

Join Zoom Meeting
https://marex.zoom.us/j/88631711624?pwd=A9B7qjJnmDKwD2oxCrIavZgOzBtVlv.1

Meeting ID: 886 3171 1624
 Passcode: 214831

We have chosen this time as the best opportunity for ALL our clients to join (late though it might be for some). We wanted to avoid the US data dump at 13:30hrs BST then China’s evening session open at 14:00hrs BST. We do hope all of you will be able to join us. A quick summary:

 

Metals price divergence to widen further as fundamentals reassert

 

The economic split in China between the “old” and “new” economy continues to show increasing divergence, and the upcoming Third Plenum, which is focused more on the structural direction of policy, will likely add to these divisions especially if there is a further uplift to the support for the green energy sector in particular.

 

In contrast to China, the Indian economy continues to exceed my bullish expectations, and while the election result was a surprise to many, the structural direction of economic development remains in-tact and may even see a further acceleration in the months ahead.

 

As markets now refocus on fundamentals, I believe the outlook 2H24 remains positive for copper and aluminium prices, while zinc and nickel should remain under pressure.

 

 

 

And we kick off this week’s report with the great Francis Ford Coppola’s 1983 film of SE Hinton’s novel “The Outsiders” not to discuss the xenophobia currently feeding so much of the world disorder and social unrest. Nor to focus on the majority of the ill educated populace whose sources of news and information are so corrupted in terms not only of accuracy but also in terms of the speed with which they are delivered and the volume of said input.

 

Rather it is the uncertainty of our current outlook. This year’s rallies having been fed by the heavy imprint from larger outside money flows which entered but which have since the peaks in the 2nd half of May now exited our space.   We find ourselves having made substantial retracements from those peaks.

 

The metals complex having now become the equivalent of those “Outsiders” see a grid of the BCOM’s performance in 2024:

 

Or see a grid of last Monday’s weekly Marex commodity index returns and etf flows:

 

 

All our recent flow has been about the great RR. That not some allusion to any bank rates path nor a central government subsidy plan. Neither some extreme political think tank. Rather RISK REDUCTION. The sell off as length bales. But even the recent bounces fuelled by fast money shorts (mainly systematic) covering. Those having established on the rapid price retracements according to Marex position estimates.

 

One of the major narratives around the price gains – the synchronized recovery in global growth albeit off a low base. That has palpably stalled as one can see from a chart of the CITI global economic surprise index. Between the start of the year and 11th April, world data releases were beating expectations. This the white line. But since then, the data has been a miss. The LMEX index in amber having peaked later on 21st May but which has corrected since. The dollar rallying (purple line) amid that metals sell off.

 

The result of this risk reduction is that the natural pool of participants shrinks as is its wont when the LME has passed through the official 5 day index roll window (5th-9th business days of the month) then the 3rd Wednesday cash pricing (last Monday). The result can be felt with the HFT footprint becoming heavier and which leads to liquidity gaps and makes good execution more tricky at times. As we enter the middle of this week, we look forward to a pick up as the market sets itself up for the end of the 1H24.

But recent price action has not just been determined by a market squaring up. But also, it has been marked by a continuing absence of meaningful Chinese flows. July 3rd is the when the 3rd plenum is scheduled but the surprise will be for something really meaningful to emanate from this government meet.

Pretty much all the gains from the mid-April government supportive measures announced around the China real estate sector have unwound. See the Shanghai Property Index back to levels and break out area from end of April.

Furthermore, it has been the continuing onshore stock builds during a period when seasonally you would expect to see draws which has been such a disappointment. These now beginning to draw and attach a chart of Shanghai weekly deliverable stocks but not at the speed with which one can say, “this is it”.

 

 

Given the recent importance of exports to the state of Chinese economy, there are growing concerns around increasing trade barriers and the threat it presents to those exports in the future. Although we read yesterday a headline that Chinese and European negotiators are set to meet to discuss EV tariffs.

Then the geopolitical threat. Russia’s growing relationship with North Korea and the threats it presents to a peninsula in China’s backyard. Not to mention last week’s threats towards Cyprus from Hezbollah over who is using its airbases. The latter fuelling energies recent resurgence. But that which has also benefited from the small matter of European elections. The educated western leadership so wrong in its interpretation of the mood of its voters, the growing potential for a shift to the right, resulting in the realisation traditional carbon emitting forms of energy provision should benefit. Green moves less of a priority? See a chart of the France Germany 10 year spread to illustrate money markets reaction to those French elections.

 

The BCOM energies sub index is now up more ytd than the industrial metals sub index. That ratio having made its low on 21st May but which has bounced in energies favour since the 4th June.

 

Likewise, when you look at a ratio of the BCOM index versus the Dow see how the stock market has outperformed since the end of May.

 

 

Base metals had become spoiled over the prior 2-3 months amid that “outside” activity. See a grid of monthly ranges and you can see its somewhat natural after April and May (and the first half of June) that some sort of pause is natural.

 

So what gives? What can be the triggers from a change in the consolidation and chop, so many including many on our desk are beginning to expect? That view reinforced by the vol pressure with a weekly chart of the rolling 2nd month at the monies attached. Comex copper having halved since its stop out peak (39 to 19%). Ali and nickel also having come under pressure. Not so many looking for big downside. Moreover, many now fearing we have seen the highs for the year.

 

Plenty of data from the USA this week culminating in Friday’s PCE deflator, which I gather is a key inflationary gauge for the FED. We also saw some commentary around potential for a September cut. This all speculation. As is the analysis around the potential for a US dollar sell off as we start to approach the US November presidential election.

Clearly, we need a greater involvement from China. But primarily we could do with our metals markets getting themselves short. Positioning remaining so key as to how our prices behave. On that note its worth noting that Guy Wolf’s analysis of Risk Premia relative value positioning (again becoming a more significant price driver in a shrinking pool of participants), see how our base metals have seen shorts establish since early to mid-June. Length remaining static in oil but which has built in nat gas. This on his NEON channel.

 

 

 

You can also make the point that we have other synthetic shorts in our space. That from both real money investors whom cannot go short outright (rv as you can see above) and whom have so substantially reduced exposure to commodities. Likewise, those trade counterparties living on a hand to mouth basis create a situation where a demand turn will be more keenly felt. And there lies the rub. 2024 has been about a supply shortage. That a path more tricky to negotiate than a demand led rally.

 

We have become one of the “Outsiders” but there remains a Diane Lane character out there whom will express kindness and courtesy. Do the right thing…. Its now about timing and navigating what can be broad vicious chop.

 

Price performance at cob 21st June 2024:

 

 

 

 

Ali

 

 

 

 

 

 

 

 

Copper

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chilean copper giant Codelco says its mines at Andina and El Teniente are operational despite heavy rain and snowfall, and are currently staffed with essential personnel only.
 

 

 

 

Nickel

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weekly and half yearly close on Friday. Monitor Wednesday in case that afternoon gives us signals of those flows. But choppy environment we find ourselves in. Price will likely force length back in on the rallies.

 

MY APOLOGIES TO LEAD AND ZINC BUT ITS GOODNIGHT FROM HIM.