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(Repetition without change The opinions expressed here are those of the author, a Reuters columnist.)
* LME volumes by contract in the first half of 2019: tmsnrt.rs/2G68LVf
By Andy Home
LONDON, July 10 (Reuters) – Base metal markets are suffering from the fatigue of trade war.
The trading activity on the London Metal Exchange (LME) fell by 7% in the first half of this year, as the micro-fundamentals were summed up by the stalemate between the United States and China.
It's not just London. Activity on CME's copper contract has also declined and even Chinese speculators appear to have largely abandoned base metals for the time being.
In a world of twitter politics, the rules of uncertainty and money have obviously left the sector for more interesting markets such as gold and iron ore.
The question is what could bring him back?
TWITTER EXHAUST
According to Dr. Guy Wolf, global market badyst at LME broker Marex Spectron, the base-metal complex has been exhausted by commercial warfare rhetoric.
He is trapped in a reactionary state, "where every title or tweet is perceived as potentially significant, whereas in practice, it ultimately does not make sense," Wolf wrote in a July 3 note.
The news feeds that sparked the commercial activity last year now only lead to "inertia and paralysis," according to Wolf, who concludes that for such base metals as as copper and zinc, "risk reduction has already occurred".
Industrial players stand apart, leaving much of the trading activity to what Wolf calls a "growing spectrum of quantitative strategies" and the rest of us would call "the algorithms".
The current state of the game is clear from the volume numbers of the first half of the LME.
The total number of billable volumes, including unallocated transactions, decreased by 7%, or 6%, on an average daily basis, from January to June. Only three smaller contracts recorded trade growth compared to last year – tin, aluminum alloy and cobalt.
All three are located below the investment radar and are therefore partially isolated against macro turbulence. In the case of tin and alloy, higher volumes accompanied accompanying squeezes over time.
Aluminum, the most liquid contract of the stock market, saw its activity decline by only 3%, an honorable performance given the volumes of last year which were boosted by extreme turbulence in April, following the US sanctions against Rusal in Russia.
In contrast, preferred investors such as copper, zinc and nickel all recorded a contraction in activity of 9% for the first two and 10% for nickel.
The LME, which last year recorded a three-year decline in activity with underlying volume growth of 5%, has been found with collateral damage in the larger trade dispute .
CME's copper contract experienced significant swings in speculative positioning as the funds tried to guess the outcome of the conflict, but this did not prevent copper futures volumes from falling 27% from 2018 .
Base metals are also poorly seen in China.
The copper futures contract on the Shanghai Futures Exchange (ShFE) saw its volumes contract by 24%. Activity on the ShFE base metals plateau declined, with the exception of zinc, which recorded a 23% increase in trade.
IRON ORE, THE GROWTH OF STEEL
Some Chinese gamblers may have turned to the burgeoning iron ore market, which has seen a turbulent recovery this year due to strong demand for Chinese construction and the disruption of the Brazilian supply after collapse. Vale's tailings dam in January.
Trading activity on the Dalian Exchange iron ore contract significantly accelerated compared to May with volumes in June and open interest rates up 39% and 31% year-on-year respectively .
Rising prices generated a wave of investment, steel manufacturers now claiming that Beijing "maintains the market order". This reminds us that on Chinese commodity exchanges, liquidity can be a double-edged sword.
The iron ore fever has spread to the Singapore Exchange, the main trading hub outside of China. Futures volumes of iron ore increased by 48% compared to the first half of 2019 and options by over 86%.
LME does not offer a contract for iron ore, but it is betting it can enter the steel supply chain with the launch in March of two new hot-rolled coil manufacturing contracts (HRC) ), bringing to four the number of its ferrous.
The existing rebar and scrap contracts appear to have stagnated so far this year, but new products for Chinese and North American steel experienced a rise in liquidity in June, with respective volumes of 2,135 lots and 1,505 lots.
The CME steel contract HRC is a potential arbitration beacon, whose volumes doubled in the first half of the year to reach the equivalent of 2.2 million short tons.
This is the strongest business performance since the beginning of the contract in 2010 and suggests that forward transactions are making a gradual breakthrough in the world of steel pricing.
TIME TO PURCHASE?
While the LME grows its ferrous products, the exchange remains highly dependent on its well established base metal range.
And most of these prices tend to fall, except nickel, outperforming, trading at levels close to the beginning of the year.
There is no trade theme other than the grueling negotiations between the United States and China.
What could change, in the absence of imminent resolution of the central dispute between the United States and China and its multiplier effects on tariffs?
Analysts looking for a fundamental stimulus, such as those of Citi, base their hopes on China and on a renewed acceleration of total social financing, a vast network launched to capture all kinds of credit flows. It increased 30% from one year to the next during the five – month period ending in May. ("Metals Weekly", July 8, 2019)
According to Citi, China's credit boost "is, at one and a half kilometers, the best leading indicator of a recovery in the global economy cycle over the past decade".
The bank advises investors to expect further impulse growth before "buying the metals aggressively".
Marex Spectron's wolf takes a more quantitative approach and says the soaring global trading liquidity in early July has already opened the "best risk-return ratio for base metals so far this year."
The broker's liquidity index has been "an excellent leading indicator" for copper in recent times, suggesting "a few positive months ahead" for the base metals preferred by many funds.
Wolf's call to copper is more nuanced, especially in terms of timing, but his vision as to boils down to a simple truth of the market.
Although no one can predict the outcome of trade wars, "it's time to bet on a positive scenario, when all hope is lost."
The world's three largest metals exchanges, in London in the first place, can only hope that he is right, because the continuation of the trade structure in the first half of the year suggests more inertia and paralysis.
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