(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)
The remarkable one-year rally in base metal prices has been primarily driven by China’s rapid covid-19 recovery.
While the coming demand boost for metals such as copper from the green revolution excites the supercycle bulls, it is China’s resurgent manufacturing sector that is determining the immediate pricing landscape.
This rally has also been largely traded in China.
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The Shanghai Futures Exchange (ShFE) has seen metals volumes boom since China emerged from lockdown in the second quarter of last year.
Trading on the London Metal Exchange (LME), by contrast, fell by 7% last year and average daily volumes slumped another 13% in the first half of this year.
The divergent fortunes of the Chinese and international marketplaces reflect the lopsided nature of the pandemic recovery to date. While policymakers in Beijing are now trying to take the heat out of the stimulus-fuelled fires, the rest of the world is only starting to pick up recovery momentum.
There are signs that just as the physical demand pendulum is shifting westwards, so too is trading activity. LME trading volumes grew in May for the first time since March 2020 and they did so again in June.
The exchange, which is the primary metals price setter for the world outside of China, can only hope the trend has turned as it gears up to launch six new contracts next week.
The ShFE, which caters for China’s domestic metal markets, continued to see double-digit volume growth across all its main contracts in the first half of this year.
However, there has clearly been a rotation away from previous “hot” metals such as copper and nickel in favour of the ferrous sector and less sexy markets such as lead, aluminum and tin.
Copper futures activity slowed noticeably over the second quarter. Volumes in June were the lowest since October last year, while market open interest at the end of the month was down by 18% on June 2020.
The ShFE’s hot-rolled-coil (HRC) steel and new stainless steel contracts registered the strongest volume growth in the first half of 2021, part of a broader speculative rush into a local steel market galvanised by government attempts to curb production growth.
A similar bull narrative is driving the Shanghai aluminum market, which hit a 13-year high in May amid an explosion of trading action. First-half volumes jumped by 152% year-on-year in this previously neglected metal.
Tin, another forgotten metal, has seen a comparable surge in speculative activity as the Shanghai price has soared to life-of-contract highs.
However, glut not shortfall explains a near tripling of activity on the Shanghai lead contract. While the price action has been laboriously range-bound so far this year, ShFE registered lead stocks have mushroomed by 87,000 tonnes to 132,842 tonnes.
The financing of that extra inventory is evident in both the higher volumes and exponentially rising open interest. The end-June total of 125,292 lots was up by 119% on last year’s 57,141.
While bull markets have turbo-charged volumes in Shanghai, the rest of the world has been something of a bystander.
LME trading activity fell steadily over the last eight months of 2020 and the first quarter of 2021 even as the metals price rally gathered steam.
May and June saw the first year-on-year rises in trading activity in over a year, albeit not sufficiently strong to prevent the headline figure tumbling again over the first half of 2021.
There has been a heated debate in the LME community as to whether the suspension of the open outcry ring has contributed to deteriorating volumes.
But it’s worth noting that the same lack of participation has been evident on the CME’s copper contract.
Volumes flat-lined last year and the first quarter of this year even as the copper price more than doubled.
The absence of any obvious trading boost from higher prices on either the CME or LME suggests Western investors haven’t bought into the bull narrative in the same way their Chinese counterparts have.
Significantly, though, CME copper volumes jumped over the second quarter, complementing the change of direction on the London market.
The trading momentum in copper seems to have passed from east to west over the last couple of months and both the LME and CME will hope that’s part of a broader metallic trend as each launches new trading products.
The LME and CME are both competing for their share of the steel, aluminum and battery metals markets as futures pricing spreads in all three sectors.
The LME’s three new steel contracts will cover the Indian and Taiwanese scrap markets and the European HRC market and bring the exchange’s ferrous suite to seven contracts.
CME now offers six ferrous products, including iron ore, and it remains to be seen whether the joint thrust to capture steel market pricing is mutually beneficial in the form of enhanced arbitrage or whether one exchange will emerge dominant.
Certainly, CME appears to have a lead in the aluminum premium race, into which the LME is launching the third contract for European duty-paid metal.
The LME’s US Midwest contract notched up turnover of just 871 contracts – 21,775 tonnes – in the first half of the year, dwarfed by the 960,000 tonnes traded on the more established CME contract.
The LME’s new aluminum offering is also up against an established CME incumbent, which has been trading since 2016, but the London exchange’s new used-beverage can scrap contract opens up a whole new part of the metals supply chain to futures pricing.
The next big exchange battle for volume will be in the booming battery metals sector.
CME’s new cobalt contract, which launched last year, notched up its best monthly performance in June with turnover of 1,344 contracts. The LME’s existing physically-settled cobalt contract, by contrast, has been locked in a trend of declining activity for the last three years, while a cash-settled offering has yet to trade.
The LME is undeterred, launching a new lithium contract to compete with the CME’s new product, which traded only a token 5 lots in May and not at all in June.
Both exchanges will have one eye on the new Chinese lithium contract launched by the Wuxi Stainless Steel Exchange last week.
The world of metals trading is becoming increasingly multi-polar, reflecting the rise of China’s futures markets over the last decade.
But right now the metals trading baton shows tentative signs of being passed to the rest of the world.
(Editing by Emelia Sithole-Matarise)