LME WEEK 2020: Base metals 2021 negotiations start in virtual ‘mating season’

With a virtual LME Week starting on Monday October 19, the base metals market is starting to focus on negotiating 2021 contracts. Here, read about how the evolving nature of virtual negotiations is affecting the aluminium, copper, nickel and tin markets.

Aluminium: Uncertainty stirs expectation of active spot market
Aluminium market participants are likely to put extra emphasis on spot deals for 2021 with buyers unwilling to commit to large long-term tonnages.

With next year’s demand uncertain due to the return of Covid-19 restrictions, consumers are hesitant to book long-term deals. Committing to long-term fixed deals means consumers would face potential upside and downside risk depending on how pandemic-related lockdowns affect end demand.

Instead they’re opting to take their chances in what is expected to be a volatile spot market.

“There’s only short visibility, no long-term forecasts,” an aluminium product producer said. “It’s not like in the past. Now everyone should learn to work with short visibility with spot inquiries and very quick changes.”

Some sellers said they are looking toward quarterly agreements for tonnage and price, whereas others are expected to want flexible contracts.

“Will they be looking for flexible pricing? It’s hard to tell at the moment… if the market picks up some might want to make sure they have good pricing and have secured their volumes if market [activity increases],” Alvance Aluminium Dunkerque managing director Amélie Hennion told Fastmarkets in September.

Not only has the absence of a physical LME Week had an impact on aluminium contract discussions, the loss of a physical Fastmarkets International Aluminium Conference has also had an effect. 

“Usually you would start early discussions at the aluminium conference and then chat again at LME Week but both of those things aren’t happening. Online it is easier to delay and not respond,” an aluminium trader said.

“Doing negotiations on the phone is weird but it’s doable, thank god for [Microsoft] Teams and Zoom. It’s very factual, you don’t have time for a broader discussion,” a second aluminium trader explained.

“There’s no rush from the consumers to sign long-term contracts. It’s still early in the process, I’m not unpleasantly surprised about the unwillingness to fix tonnage for next year, especially with the way the forwards are trading.”

Participants are waiting to see how European P1020 forwards on the Chicago Mercantile Exchange will trade in the coming weeks, with premiums for 2021 trading higher than spot premiums as of Friday October 16.

Further upstream, alumina market participants are also beginning 2021 negotiations, but progress remains slow.

“There haven’t been many long-term contracts signed. We would like to lock in some of our tonnage, but we also want to remain flexible. Things are slower this year,” an alumina producer said.

Over the years, more long-term alumina contracts have moved from being priced as a percentage of the London Metal Exchange aluminium price to floating contracts based on the average alumina index (API).

An increasing number of alumina deals are also being concluded on a spot basis.

“This year alumina prices were nowhere near as volatile, and the market remains oversupplied so some buyers might take an extra punt on the spot market next year,” an alumina trader said.

Fastmarkets’ average alumina index price, fob Australia for 2020 to date is $266.59 per tonne compared with an average of $331.40 per tonne in 2019.

The 2020 API has been at 16% of the LME aluminium cash average for 2020. This is compared with the 2019 average of 18% of the LME aluminium cash average.

Copper: Financial pressures could crimp Asia buying appetite
The 2021 annual contract ‘mating season’ for copper will have an additional dynamic compared with previous years.

A pullback from commodity trade finance is pressuring some Asia-based trading houses out of the business, and leading others to switch strategies from going long at benchmark premiums.

Throughout 2020, major banks from across Europe, the Middle East and Southeast Asia have placed onerous conditions on obtaining new credit lines, while some have announced they will be leaving the commodity trade financing business completely.

“With these Singaporean and European banks narrowing down their lending it will be really tough for trading houses to maintain volume. That will be the focus for next year,” a trading source in Singapore told Fastmarkets.

“It’s not about the premium, it’s about how many tonnes you’re able to sign up to for a year.”

The $88 per tonne premium offered by Codelco to Chinese clients in 2020 was a rollover from 2019 levels and to the joint highest since 2016.

And the bulk of market sources anticipate another rollover in line with what has happened in Europe. Codelco has kept its 2021 offer to Europe at $98 per tonne, while Aurubis’ premium stuck at $96 per tonne for next year.

Usually, Chinese seasonal demand for copper peaks in October, when buyers pick up tonnages, but major imports during the summer months have led to a stock overhang and minimal demand for imports.

Fastmarkets’ copper grade A cathode premium, cif Shanghai peaked this year in September with a monthly average of $52.05 per tonne, compared with $82.30 the previous year and $102.95 in 2018.

With uncertainty over both supply and demand for next year heightened, a large chunk of the market will opt for floating premium contracts, such as those offered basis Fastmarkets’ daily copper grade A cathode ER premium, cif Shanghai.

“Many traders or consumers are trying to get this condition when buying from producers, if not they’ll look to take the spot market on next year,” a second Asia-based trader said.

Tin: Pandemic adds to shaky supply fundamentals
Long-term contract negotiations in the tin market often took on a unique nature even before this global pandemic derailed the sector, one European-based tin producer told Fastmarkets.

Declining ore grades, a lack of mining incentive and low exchange stocks have traditionally plagued the market with large backwardations across its forward curve. And as the most expensive commodity among its base metals peers, securing longer-term investment has long been a challenge.

For producers, custom production and specialization has been the biggest opportunity to secure deals. But for consumers, commitment levels do not stretch that far.

“The pandemic has meant that we decided not to sell any spot material this year. We were worried or unsure of any incoming tin units, and we decided not to sell any tin material on the refined side and focus on maintaining our long-term contract relationships,” a European-based tin producer told Fastmarkets.

Similarly, tin traders also indicated that pre-established relationships have been useful in securing forward tonnages in uncertain times, but with market dynamics swiftly changing, renewals are by no means guaranteed.

“Things are okay for [long-term contract negotiations] this year, thankfully,” a European-based tin trader told Fastmarkets. “We have a list of customers and distributors and most of them will likely renew their contracts. But I think the premiums will be higher this year due to elevated freight levels and increased demand from China for metal.”

Nickel: Contracts up for grabs as EV supply chain strengthens
Demand for class 1 units for electric vehicle (EV) battery evolution continues to grow while appetite for the market’s most significant consumer, the stainless-steel sector, continues to be sated by cheaper units such as nickel pig iron (NPI).

So, while the nickel market is on the precipice of potential pricing bifurcation to service these two sectors, demand is relatively low.

The buzz around preferential battery material nickel sulfate continues to cause a stir in the market after Tesla boss Elon Musk offered up long-term contracts to producers willing to mine the product in a clean, “green” manner.

And with Terrafame’s Trafigura-backed battery chemical plant set to bring 170,000 tonnes per year of the material online in 2021, market supply looks set to grow.

But despite calls for greater pricing transparency, the a currently immature seaborne market is based on long-term contracts.

“The market is very much contracted and everyone wants a long-term, secure contract for raw materials but I think it would be good for our customers as well as us that there would be a transparent spot market too,” Terrafame chief executive officer Joni Lukkaroinen told Fastmarkets.

“We have seen this year with Covid-19 many markets causing problems in the value chain. Transparency would help the supply chain but volumes and liquidity are required to do this and currently they are not very big.”

Chinese nickel sulfate prices enjoyed a seven-week rally between July 3 and September 4 before stabilizing at their current level on September 25. Fastmarkets assessed the price of nickel sulfate min 21%, max 22.5%, cobalt 10ppm max, exw China at 27,000-27,500 yuan ($4,012-4,086) per tonne on October 16.

Elsewhere, premiums in the more established and active cathode markets remain at an historic low, with that expected to be factored into contracts for 2021.

Many stainless steel consumers are seeking fixed premiums for the whole of 2021, and anticipate that they will be able to fix contracts against current low levels given the current dearth of demand.

“To anticipate an increase in premiums seems rather wishful thinking. I would also have a hard time talking about tightness of material when producers are holding significant stocks due to this particularly challenging year,” a European stainless steel producer told Fastmarkets.

Fastmarkets assessed the nickel uncut cathode premium, in-whs Rotterdam at $35-60 per tonne on Tuesday, its lowest since January 2016. The premium fell by $25-40 per tonne (40.6%) from $60-100 per tonne the week before. The premium had held its previous range since January 28.

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