Bottom Line:Nickel has provided a wild ride for traders in the past several weeks. After trading resumed last week Wednesday, the 3M contract has closed limit-up or limit-down in six of the past seven sessions. Limit-up/down is the maximum amount that the price of a commodity futures contract is allowed to increase or decrease. From last Wednesday to this week Monday, that contract had four consecutive limit-down closes. A brief reprieve occurred on Tuesday; however, the 3M contract still fell by about 10% that day. This was followed by two limit-up closes. Traders cited by Reuters believe that thin volume is causing the instability in nickel prices. Late this week Bloomberg also confirmed that Tsingshan Holding Group Co, the world’s largest nickel and stainless-steel producer, is covering some its large short position. The unwinding of this large position is also adding to the volatility, according to traders cited by Bloomberg. |
|
Tsingshan Holding was at the center of a historic “short squeeze” that occurred earlier this month. As a hedge for future nickel sales, Tsingshan had been building a large short position in LME nickel contracts over several months. However, this position become problematic when on Tuesday, March 8, the LME 3M contract traded to $101,365/mt, a 250% move from the prior Friday’s settle at $28,919/mt. Citing “orderly market grounds,” the LME suspended nickel trading that morning. Before trading could reopen, the LME demanded that Tsingshan cover their margin call that totaled several billion dollars. To cover margin calls and maintain the short position (i.e., hedge), Tsingshan received loans from JP Morgan and China Construction Bank, according to the South China Morning Post. With this trader’s margin calls met, the LME reopened trading on Wednesday, March 16. Please note that most hedging in the US is not done directly on an exchange. It is especially rare for AEGIS clients to trade directly on an exchange, subject to those margin requirements. Instead, our clients almost exclusively place hedges (trades) with banks and other swap dealers (large, regulated traders). These trading counterparties offer margin management as part of the service. Their margin requirements are usually tailored to the company and differ from what the exchange would require. We can guide you in what terms to watch for when selecting counterparties. Nickel consumers may be hesitant to use financial hedging, considering the wild swings and new limit rules imposed by the LME. When this market returns to normal, the LME contract should again be a good risk-management tool. LME Nickel price volatility can be mitigated through financial hedging for both consumers and producers. AEGIS urges a statistical approach that measures how much you should hedge to reach your financial goals if prices move against you. Please contact AEGIS for specific strategies that fit your operations. |
|
Notable Metals News
CME HRC prices could stay strong, as the US continues to cap steel imports. Despite South Korean efforts to negotiate, the US will not end the quota on South Korean steel imports, according to US Commerce. Currently South Korean steel is subject to a Section 232 Absolute Quota. Under the Section 232 Absolute Quota, the annual duty-free import volume of South Korean steel is strictly limited to 2.68 million mt per year. Absolute quota merchandise may not be imported into the U.S for consumption after the quota limit is reached, according to the US Customs and Border Patrol. With approximately 2.53 million mt in 2021, South Korea was the fourth-largest source of steel imports into the US, according to the US Census Bureau. The comments on limiting South Korean steel imports were from US Commerce Secretary Gina Raimondo in a Reuters interview late Wednesday afternoon. The US has recently eased tariffs on steel imports from the UK, EU, and Japan.
The LME will not abide by its own committee recommendation to ban Russian copper from LME warehouses. However, the exchange is in talks with several unnamed governments about whether it should continue to accept Russian deliveries into their warehouses, according to Bloomberg. Anonymous sources cited by Reuters claim that banning Russian metal “would exacerbate already tight supplies” and “a ban may also prove unlawful if no sanctions against producers are in place.” Based on recent LME data, nearly 12% of the LME’s aluminum in LME warehouses is Russian. Likewise, approximately 16% of nickel and 3% of copper in LME warehouses is of Russian branding.
Western efforts to distance themselves from Russian metals companies might keep aluminum prices elevated. Early Sunday the Australian government announced it has banned exports of alumina, a key ingredient for aluminum production, to Russia, according to Reuters. This is part an ever-expanding list of sanctions Australia has placed upon Russia. In the announcement, the Australian government asserted that “Russia relies on Australia for nearly 20 percent of its alumina needs” and also stated “that the move will limit Russia’s capacity to produce aluminum.”
|
|||||
LME Aluminum |
|||||
LME Aluminum 3M settled at $3,605/mt, up $224/mt on the week. The forward curve for LME Aluminum is currently quite backwardated, meaning that spot prices are higher than futures prices. A backwardated forward curve favors the consumer hedger. The aluminum market has sufficient liquidity to use swaps and options. Consumers might consider strategies that use only swaps or options or a combination of both, depending upon your risk tolerance. Please contact AEGIS for specific strategies that fit your operations. |
|||||
|
|||||
Prompt month CME MWP last settled at 39.265¢/lb this week. The CME Midwest Premium swap market is thinly traded, and there is no options market. Hedging in this market is tricky, so we recommend using strategically placed limit orders. Please contact AEGIS for specific strategies that fit your operations.
|
|||||
LME Copper |
|||||
LME Copper 3M settled at $10,267/mt, down $64/mt on the week. The forward curve for LME Copper is currently quite backwardated, meaning that spot prices are higher than futures prices. A backwardated forward curve favors the consumer hedger. The copper market has sufficient liquidity to use swaps and options. Consumers might consider strategies that use only swaps or options or a combination of both, depending upon your risk tolerance. Please contact AEGIS for specific strategies that fit your operations.
|
|||||
|
|||||
LME Nickel 3M settled at $35,491/mt, down $1,424/mt on the week. Like LME copper and aluminum, the forward curve for LME Nickel is currently backwardated, meaning that spot prices are higher than futures prices. A backwardated forward curve favors the consumer hedger. The nickel market has sufficient liquidity to use swaps and options. Consumers might consider strategies that use only swaps or options or a combination of both, depending upon your risk tolerance. Please contact AEGIS for specific strategies that fit your operations. |
|||||
|
|||||
|
|||||
CME Hot Rolled Coil (HRC) Steel |
|||||
Prompt month HRC Steel last settled at $1,117/T. For CME HRC Steel, liquidity is low for swaps, but hedging can still be done with strategically placed limit orders. The same is true for options. Similar to other metals, a combination of both swaps and options might work in certain cases, depending upon your risk tolerance. Please contact AEGIS for specific strategies that fit your operations. |
|||||
|
|||||
AEGIS Insights |
|||||
03/23/2022: AEGIS Factor Matrices: Most important variables affecting metals prices 03/23/2022: Russian Metals Production and Related News: Most Recent Developments (AEGIS Reference) |
|||||
Notable News |
|||||
3/24/2022: Nickel turmoil is back as prices spike 15% again to hit limit 3/24/2022: LME benchmark nickel jumps 15%, hits price limit in thin market 3/23/2022: U.S. not looking to renegotiate Trump-era steel quotas with South Korea, says Raimondo 3/23/2022: LME benchmark nickel spikes 15% to hit limit up 3/22/2022: METALS-Supply fears lift aluminium, nickel shows signs of normalising 3/22/2022: LME says it has no current plans to ban Russian metal from its system 3/20/2022: Australia bans alumina exports to Russia, sources coal for Ukraine 3/18/2022: LME’s copper industry group recommends banning Russian metal |