The metal industry is braced for what some are forecasting to be the gloomiest LME Week for 15 years or more.
Current conditions – a worsening macro picture, over-supply and poor demand – provide little to cheer about.
Although prices have rebounded from multi-year lows, there is still room for further downside. Copper recently traded at $5,332 per tonne on the LME compared with $6,530 this time last year, showing how poorly the metal has fared.
And continued uncertainty has weighed on volatility and risk appetite, making for a chilly and barren landscape for traders and brokerages.
“This is a multi-year trend and not just a few months – people need to strap themselves in and prepare for a rollercoaster,” Société Générale analyst Robin Bhar told FastMarkets. “We haven’t seen prices this low for a long time and, although the last few years have not exactly been euphoric, this is the new reality.”
Markets are awash with metal and there is a feeling that producers could have reacted more quickly by reducing output; still, moves are at last becoming more frequent, with Glencore the latest to announce cuts to its zinc and lead production after suspending 400,000 tonnes of copper output last month.
While the zinc price jumped more than 10 percent on the news, it is still down 25 percent since last year’s event. But the news will dominate conversation next week and could tempt investors back in from the cold.
“Announcing such a large cutback on the eve of LME Week seems a shrewd move – it will inject some optimism into the market and raise expectations that other producers may follow suit. More cuts and low prices may also get investors interested again,” FastMarkets analyst William Adams said.
One of the key reasons for the downturn in sentiment is the slowdown in China. While the IMF still pegs growth more than six percent this year, there has not been the take-up in metals that had been expected.
“Structural over-capacity and debt strains have unquestionably taken a heavy toll on Chinese growth prospects, which were primary drivers of the metal price appreciation in recent years,” a US-based source said.
Worryingly, no other country is in the pipeline to replicate China’s great bull run – “not in our lifetime anyway”, Sucden director Jeremy Goldwyn said.
“[But] we see China [getting] better next year… it is difficult to see how China can be battered by such a colossus of headwinds again next year,” Macquarie analyst Vivienne Lloyd said.
The harsher regulatory landscape and the exit of western banks have raised questions about London’s primacy in the metals trading world.
“For most funds, prices are but a feature on a screen. Many of the industrial clients have been forced to go over the counter (OTC) in this challenging regulatory landscape and therefore the LME and its location have lost its relevance,” the US-based source said.
But the death of London as a financial centre is a long way off, Sucden’s Goldwyn said, even if LME parent HKEx looks at dual clearing jurisdiction.
“Do not underestimate the impact – real or perceived – of London’s regulatory status,” he added.
“London is an important bridge between the Asian and the US trading timezones. Its legacy, geographical position, and the step down in Asian firepower since the A-shares meltdown should ensure its continued – but hotly contested – position at the centre of the world’s metal trading,” Lloyd said.
The LME refuses to stand still while the debate rages. It will relocate to premises on Finsbury Square by the first quarter of next year and has re-iterated its commitment to the ring – a new trading floor will be built here.
Several new products are set to launch next month, including an aluminium premium contract, steel rebar and steel scrap. And after the furore that followed the increase in trading fees last year, the exchange has pledged to keep rates on hold this year.
And its competitors are not sitting idly either – CME Group will launch a physically delivered lead futures contract later this year, having rolled out its European aluminium premium duty-unpaid futures contract just last month.
So amid the gloom, sparks might still fly next week.
(Editing by Mark Shaw)