Nickel chaos at LME chills metals trading activity: Andy Home

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LONDON – The suspension by the London Metal Exchange (LME) of its nickel contract in March led to a sharp drop in metal trading activity.

Total LME volumes fell 21% in the second quarter compared to the first three months of 2022.

Nickel was unsurprisingly the biggest casualty with the Shanghai Futures Exchange (ShFE) nickel contract also frozen.

But the chilling effect has spread to all LME base metal commodities over the past three months, suggesting an exit from institutional players unhappy with the exchange’s cancellation of nickel trades, a decision which is now being challenged https://www.Reuters. com/markets/commodities/lme-nickel-lawsuits-are-about-principle-much-money-2022-06-09 in the UK legal system.

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The LME’s nickel woes are intertwined with larger macro trends.

COVID-19 lockdowns depressed Shanghai trading volumes on basic and steel contracts in the first half of the year.

Recession fears are currently generating a much wider exodus of investors from the commodities sector, ironically just as retail players seem to have an appetite for industrial metals.

BROKEN NICKEL

The LME nickel contract has come back to life after a six-day suspension, but volumes have since been cut significantly.

Average daily volumes nearly halved following the fateful March 8 intervention. May’s total of 40,177 lots (futures and options) was the lowest since January 2012.

Nickel’s cash drain was even more pronounced on the Shanghai Futures Exchange (ShFE), which saw first-half trading volumes plummet 69% year-on-year. Open interest at the end of June was 95,914 contracts, down from 227,738 a year earlier.

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Open interest in LME nickel futures fell to 160,528 lots in May, its lowest level since 2012, when the global nickel market was much smaller.

US exchange CME Group has an ever-increasing number of contracts in metals, but not yet in nickel, which means that declining participation in London and Shanghai raises serious long-term questions about how the industry, especially the growing battery sector. , wants to hedge its price exposure.

TRAINING EFFECT

Other core LME contracts such as aluminum, copper and zinc have also seen open interest slide since March, a risk-free ripple effect spreading from the nickel chaos.

LME core volumes were down just 1.9% year-over-year in the first six months of 2022 – and just 1.1% on an average daily basis – but that masks a two-quarter story.

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Commercial activity was strong in January and February and even at the end of March, overall volume growth was 9.5% year-on-year.

That all changed in the second quarter and at the end of June, the only key contracts still showing year-on-year growth were zinc (+7.2%) and lead (+1.5%).

Collateral damage has so far been limited to base metals and not the steel trade.

Indeed, the LME’s two best volumes in the first half were its Steel Rebar contract, up 83%, and its Steel Scrap contract, up 31% over the same period. of 2021.

CME’s ferrous contracts also saw strong overall volume growth in January-June.

Steel futures are still a relatively recent development outside of China, but appear to be gaining momentum on both sides of the Atlantic.

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LME steel volumes, however, are still weak relative to established major base metal contracts, where market participation declined during the second quarter.

The nickel chaos in March played a decisive role, but the downward trend in open interest in the market dates back at least a year and, in the case of copper, much longer.

WHO’S AFRAID OF DOCTOR COPPER?

Open interest on the LME copper has been on a downward trend since 2015 and on the CME copper contract since 2017.

LME copper volumes have been falling every year since 2018 and fell another 7.6% in the first half of 2022, the weakest performance among large contracts, even nickel.

The CME copper contract fared less well, as futures volumes fell 27%, with only a partial dampening from higher options activity.

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Shanghai saw a 48% drop in copper futures activity, also partly offset by a boom in options trading, where volumes rose 30% to top 1 million lots for the second times only in June.

Indeed, copper trading activity has fallen roughly in tandem on the LME, CME and Shanghai markets every month since July 2021.

The dramatic rally in the price of copper linked to COVID-19, which rose from below $5,000 per ton in the first quarter of 2020 to peak at $10,727.50 in early March, appears to have actively deterred participation in the three major global shopping centers.

This is curious given Doctor Copper’s historic popularity with investors as a proxy for economic growth, a highly mobile and tradable target since the outbreak of the coronavirus in early 2020.

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Nor does it say much about the degree to which copper’s long-term bullish narrative is embraced as a key catalyst for the energy transition.

There are signs, however, that retail investors may be venturing where top-performing funds are afraid to venture.

MINI EXCITEMENT

A small portion of the metals trading universe is growing rapidly, even as activity in major exchanges languishes.

Hong Kong Exchanges and Clearing (HKEx), owner of the LME, launched its “mini” base metal contracts in August 2019, smaller versions of the 25-tonne contracts traded on the London market.

Dollar-denominated products saw volumes more than double to 417,545 contracts last year and grew a further 51% in the first half, with liquidity focused on zinc, aluminum and copper in that order .

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The contracts are aimed directly at investors, especially retail players looking for a slice of the metals trading pie.

The same goes for CME’s new “micro” copper contract, one-tenth the size of the exchange’s main copper contract, “conveniently sized and tailored for the individual investor,” according to the CME’s website. CME.

The contract was only launched in May but has already recorded 130,331 trades and 1,157 lots of open interest as of the end of June.

The LME scrapped mini-contracts in 2013 after three years of lackluster negotiation, but it looks like almost a decade later their time has come as retail players look for a way to get into the game. industrial metal trading arena.

The opinions expressed here are those of the author, columnist for Reuters

(Editing by David Evans)

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Garland K. Long