Increasing base-metals price sensitivity emerges as uncertainty weighs on consumers: LME Week

The negotiation season for long-term contracts is well under way in many of the base metal markets, and participants globally have noted that the price volatility seen so far in 2022 and the soaring energy costs in Europe have weighed on consumer sentiment

“This year has been unprecedented in many ways,” one trader told Fastmarkets.

The premiums for primary aluminium, for copper cathodes, for refined nickel and for zinc ingots have all reached record-high spot levels at some point in 2022, and these premium rises and falls have been matched by volatility in the underlying London Metal Exchange prices for base metals.

The surge in energy prices in Europe following Russia’s invasion of Ukraine made European natural gas benchmark prices rise by more than six times at their peak on August 26, compared with the corresponding date last year.

With European energy costs staying at historic high levels on fears of future disruptions, both producer and consumer margins have been squeezed in Europe, leading to curtailments of production in metals such as aluminium and zinc as well as significant closures in consumer industries such as steel.

Our costs are rising in almost every area, and fundamentally it all stems from these high energy prices. We are reaching the point where we can’t pass on our costs to our customers – they just won’t accept it.
Metals consumer

As a result, some consumers in Europe have been forced to close production lines, while market participants have noted that others have resorted to shorter working weeks, with one source saying that “our biggest client is down to three-day working weeks at most of its plants.”

Others do not have this option, needing to be open to sustain production for in-demand goods or to fulfil contractual supply agreements. As a result, some have turned to sourcing cheaper brands of material in metals such as nickel and copper.

With soaring premiums for cathodes in Europe, many consumers have begun to seek cheaper alternative LME deliverable brands in the region or imports of material from Africa.

As a result, premiums have been steadily pushed lower from the record-high levels of $85-125 per tonne on a cif Rotterdam basis, recorded on July 26.

Fastmarkets assessed the copper grade A cathode premium, cif Rotterdam at $50-100 per tonne on October 18, with liquidity confirmed at the bottom of the range.

“Fundamentally, if you can secure good quality units at below the market average [price], you’re going to do it,” a second trader said.

Nickel premiums have also been under steady pressure with consumers opting for more cost-effective units. Premiums for nickel briquettes have dropped significantly from the all-time highs achieved earlier in 2022.

Fastmarkets assessed the nickel briquette premium, in-whs Rotterdam at $700-1,000 per tonne on October 18, down significantly from its peak at $2,000-2,500 per tonne in April.

“The trend has really put the market under pressure. The numbers we sold at a few months ago just aren’t there anymore,” a third trader said.

This has not been an option so far for consumers in zinc markets, where acute supply tightness in Europe has continued to push European spot premiums to fresh record highs, and where supply and demand appear to be locked in a “race to the bottom” because of the energy prices.

Fastmarkets assessed the zinc SHG, min 99.995% ingot premium, dp fca Rotterdam at $500-550 per tonne on October 18, unchanged for two weeks, although some offers and indications now appear to be diverging.

Long-term contract uncertainty

With annual contract negotiations underway in many metals, there is a significant amount of uncertainty around long-term contract agreements for base metals due to price volatility.

“No one is in a hurry to sign for supply in 2023, not while there are so many uncertainties,” a fourth trader told Fastmarkets.

In some instances, the cheaper brands of LME deliverable material which have been driving down premiums come with environmental, social and governance (ESG) issues which could prove challenging for certain consumers.

Sustainability is a broad concern for many metal markets, particularly copper, and many producers of “green” copper have increased their premiums for 2023.

This is alongside the rise in benchmark prices in copper by more than 80% year on year for European consumers, and expectations of record-high annual contract settlement levels in other metals, including nickel and zinc. Many market participants are now holding back from long-term contract agreements while uncertainty prevails in the metals and consumer sectors.

“We are in a strange situation,” the third trader said.

He added that, with some governments in Europe asking manufacturing sectors to reduce their energy usage, and fears of a recession, “consumers are not interested in locking-in significant long-term tonnages because they don’t know what their own demand will be.”

For the zinc market, participants have told Fastmarkets that neither producers nor consumers are seeking to settle long-term contracts and are instead looking at rolling quarterly or half-year agreements due to the potential for volatility.

“Consumers don’t want them in case demand falls off and they’re left storing excess zinc units, and producers don’t want to settle yet in case premiums move higher,” a fourth trader said.

This situation could unintentionally exacerbate supply constraints, however.

“Our customers are worried about locking in high premiums, but we can’t have tonnages left exposed to the market,” a zinc producer said.

For nickel, many market participants are keeping a watchful eye on the current LME discussion paper on the acceptability of Russian material on top of concerns about the effects on European stainless-steel markets of energy prices and a potential recession.

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