LEAD & ZINC CONF: ‘Volatility is on the horizon – hedging risk is key’ – ING’s Nugent
Volatility is the key risk to lead and zinc prices for the next few years and traders should begin to hedge their risk, Oliver Nugent, commodity strategist at ING Bank, said on a panel at Metal Bulletin’s Lead & Zinc conference in London on Thursday March 22.
“Volatility is on the horizon and so much can happen – the lead and zinc prices are especially prone to this,” he told delegates at the two-day conference. “And there is huge potential for this market to flare up, with a London Metal Exchange squeeze very, very likely.”
No-one can deny the huge possibility of a squeeze, according to Nugent, who agreed it was possible zinc prices on the LME could hit $4,000 per tonne throughout 2018 – but not for long.
“Bull markets like this zinc one, historically, do not last, and I think we’ll hear more throughout the conference – people saying this one will not last,” Citi Group’s Max Layton said in another panel earlier in the day.
The London Metal Exchange three-month zinc price rose by 29.1% in 2017 and hit a fresh 10-year high.
The metal was trading at a high of $3,595 per tonne in February, its highest level since July 2007, but is currently down to a three-month low.
“I believe people need to strategize the market – it is primed for volatility this year,” Nugent said.
If volatility sweeps the market this year, hedging risk will be of huge importance to traders and companies.
Hedging is the process of offsetting the risk of price movements in the physical market by locking in a price for the commodity in the futures market.
On the LME there are two main motivations to hedge – to lock in a future price that is attractive or to secure a price fixed against an external contract.
“You cannot guarantee adversity isn’t going to happen, and if you don’t [hedge] you can be in trouble - if you can’t pay the bills,” Nugent said.
“So it should be time for people to put security in place.”
Fellow panelist Robert Fig, managing director of Commodity Risk Management Training (CRMT), said it is to the company’s advantage to manage their risk.
“If you’re not hedging, you’re speculating and if you do that you leave it to the Gods. Anything can happen,” he added.
The LME has had its lead and zinc contracts for nearly 100 years – but lead has undergone a number of changes in end-use recently with the heavy metal now reliant on battery demand and underpinned by its recycling ability.
Fig noted the metal is ‘reinventing’ itself and this means there is more risk surrounding lead.
“Lead has gone through a change – it is behind use in new vehicles and it is the most recyclable of all metals in the world,” Fig said.
“I would like to think the movement in prices we might be set to see will mean people look much more closely at the risks for lead,” he added.
Three-month LME lead prices opened at $2,498 per tonne on January 2 but have fallen 4% so far this year, after an active 2017 when the metal price climbed 23.7%.