OPINION – Qingdao’s ghosts – dire physical markets bely bullish cases for metals

LME metal price charts have been looking rosier of late, with a palpable sense in the exchange-traded markets that there are bullish cases around to invest in the complex.

And hungry for profits in a lean-margin investing climate, plenty of analysts, funds and price sensitive investors have put strong bets on metals.

Last week LME open interest on zinc was net long at 77,354 lots – the most since July last year. More people are putting bullish bets on nickel than at any point in the last two years.

“Looking at LME COTR data shows funds have been strong buyers of nickel and zinc since April/ May and in recent week they have started to buy aluminium too. They have been less consistent buyers of copper,” FastMarkets’ head of Research Will Adams said.

Debt-saddled mining companies have seen share prices shoot up in response to bullish metal stories for zinc, nickel, copper and tin.

Freeport McMoRan (222 percent increase), Glencore (191.85 percent increase), Rio Tinto (22.8 percent increase) and Vale (145 percent increase) all have made gains with investors looking to capitalise on potential growth amid turbulent debt and equity markets in 2016.

There is an element of the bargain basement hunting but even a cursory look at physical markets indicates that there could well be more pain for the industry and the complex before we see true green shoots emerge.

Physical trading companies have fared less well. Noble has stripped down their base metals trading business to its vertical aluminium segment in the US and Europe, while Gunvor have ostensibly quit the complex other than maintaining some take-off and financing deals.

Noble Co-CEO Jeff Frase referred to this, amongst other asset sales and changes at Noble as “reducing our loss-making initiatives,” in an earnings call to investors last week.

In the meantime it should be noted that smaller shops have been set up – Concord was the big story of LME week London last year and subsequently Viant has been set up in Singapore, while already well-established Kyen Resources bulked up after buying large chunks of Gunvor’s base metals book in June.

Summer is usually a slow time for trade, with many factories closing for the bulk of August. But market participants are reporting a real struggle to generate business at present.

“I feel like this is the slowest summer I’ve experienced in 15 years, it’s been a pretty tough year for most people in the industry, who’s not feeling the pain at the moment? Unless you’ve got the money to lose, you’re in a bit of a tough place now,” a trader told me recently.

This year metal consumers took less inventory on long term contracts signed to supply them for 2016, many in the market expected a more volatile spot market as a result.

But this has yet to materialise, as macro-economic worries eat away at consumer confidence globally, end markets are at best stable, meanwhile smelters have continued to churn out more and more metal.

“The real traditional industrial industries; if you ask any factory, trader or producer – no one can give you beyond a six month or one year plan,” a second trader said.
Part of the nonplussed attitude of metal consumers comes from the high levels of stocks held off-warrant around the world.

“There are millions of tonnes of stocks, can you imagine if some part of this goes onto the LME, the price will come down,” a third trader said.

Meanwhile spot market physical premiums for key metals like copper and aluminium are trending just above shipping and insurance costs, an indication of ample supply at least in the short term.
“The situation has been going on for around three to five months – copper [Shanghai CIF] premiums have been around $50 [per tonne] since then,” a fourth trader said.


So where to point the finger to? Much of the recent physical market woes can be traced back to the fraudulent events at Qingdao, where the crest of China’s metal-as-collateral financing wave finally collapsed into itself.

Subsequently the government and China’s heavily state-backed banking industry have withdrawn support for such activity, which had thrived feeding the rapidly developing country’s insatiable desire for credit.

From a physical market perspective, it can’t be underestimated how much of the market’s overhanging metal stock was used to play currency, interest rate and price arbitrages into the world’s biggest consuming country.

Perhaps more important however, is that banking industry’s suspicions of metals industry players now makes it even more difficult for consumers in the country to obtain credit needed to purchase metal for processing.

Two years on, the legacy of Qingdao might be longer than we thought.

(Editing by Tom Jennemann)