As investors and traders gather for the annual London Metal Exchange conference this week, there are signs of some miners and traders betting that one of the most painful periods in living memory for the industry is finally coming to an end.
In recent months traders have accumulated around $16bn worth of positions that will benefit if prices of copper, zinc, nickel and aluminium rise, according to data from Goldman Sachs.
Although the bets are far from record levels, they have rebounded from virtually nothing last year.
After a bruising three-year downturn, which intensified last year, confidence has slowly started to return after a series of eye-catching rallies in zinc, nickel and aluminium this year. Zinc prices have rallied 54 per cent and nickel has strengthened 21 per cent with sentiment helped by cut backs in supply by miners who decided to mothball or overhaul facilities rather than keep adding to the glut.
While commodity investors may finally be prepared to believe the worst is over, miners are still likely to be preaching the gospel of austerity as they gather this week for the annual round of parties in Mayfair.
Part of miners’ anxiety revolves around the performance of copper — a key metal for miners like Glencore and Rio Tinto which invested heavily in production during its near decade-long bull run up to 2011, when it peaked above $10,000 a tonne. Currently a tonne of copper costs less than $5,000 a tonne — roughly the same as it did at the start of 2016.
“Copper has spectacularly underperformed this year,” says Goldman Sachs analyst Max Layton. “Supply growth has been stronger in copper then it has been in zinc or aluminium or coal … that have rallied.”
Copper outlook
A central question now is whether copper’s performance can catch up with other metals given tentative signs of a pick-up in demand in China, the world’s biggest consumer of the metal.
Consultancy CRU raised its copper demand growth forecast for next year to 3.5 per cent from 1.9 per cent.
However, Beijing is now trying to cool the red-hot property market, while winter months are also seasonally the slowest periods for copper demand in China.
In a reflection of the anxiety over demand, traders says Chile’s Codelco, the world’s largest copper miner, is likely to offer a discount to China in negotiations to set a premium for copper purchases next year.
Copper is still bought on long-term contracts rather than against a daily spot physical index. The Chilean miner has already agreed $82 a tonne for Europe and China could be $70 a tonne, traders say.
The market is still expected to move into surplus in 2017 for the first time in eight years, according to the International Copper Study Group. Consultancy CRU expects a surplus of 421,000 tonnes, or more than $2bn of the metal at current prices that will not be needed.
“There’s still this feeling of copper being oversupplied,” says Vanessa Davidson, an analyst at CRU. “People are not optimistic that we’re out of the woods at the moment.”
There are miners who are more hopeful. Jean-Sébastien Jacques, Rio Tinto chief executive, expects a rise in copper’s long-term use via renewable energy and electric cars. That demand could come just as analysts forecast a supply crunch because there are few new copper projects coming online. Consultancy Wood Mackenzie, for example, says global copper mine supply is likely to peak in 2020.
Any price recovery may have to contend with miners looking to bring back supply. Glencore has temporarily closed two copper mines in the Democratic Republic of Congo and Zambia while they carry out modernisation work during the downturn.
Zinc, where Glencore has also shuttered mines, faces similar pressures with prices now well above the cost of production.
The future of the LME
Besides the murky outlook for copper and other metals, another major topic this week is likely to be the LME itself.
Many members, from hedge funds to brokers, have become disgruntled after the exchange increased its fees in January 2015. Overall volumes on the exchange have fallen 9.5 per cent this year.
The LME insists that the drop reflects the downturn in the industry, and has been partly offset by a rise in electronic trading.
However, brokers say clients have tried to circumvent the exchange following the rise in fees, while rival exchange the CME Group is courting metal trading companies. Many Chinese traders, for example, now use Chicago-based CME, according to traders.
The US exchange group is expected to make an announcement this week about new warehouse facilities that will allow it to further compete with the LME by strengthening CME’s ability to service physical traders.
Without winning over its core traders in London, the LME will find it harder to introduce new reforms, said Simon Van Den Born, head of metals at brokers Marex Spectron.
“It feels like the LME found itself caught in a place where it taxed before it reformed,” he says. “It needs to reform but having taxed first, it’s lost its base.”
Fund interest
Garry Jones, chief executive of the LME, said on Monday that the recovery in some metal prices should bring funds back to the market that had previously abandoned metals trading.
In the first eight months of the year a record $54bn has flowed into commodities as investors have chased a recovery in prices, according to Barclays.
“Although our role is not to predict where markets are going [I] will say that what we have seen in the last couple of months is a pick-up in activity and funds returning to markets where they have not been involved for some time.”
“I have had a lot of discussions with fund managers who are asset allocators and they have said we are now looking at it [commodities].”
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