2024-05-14 01:00:00
Precious metals traders are doing well again.
More than 17 million contracts were traded on the London Metal Exchange (LME) in April, making it a record month in terms of volume. Expressed in average daily volume, the activity was the second highest recorded after April 2018.
That month, the US government announced import duties on aluminum, a shock to the structure of global trade that generated a unique surge in volume on the LME aluminum contract.
This time the increase in activity has spread to the LME’s six most important base metal contracts.
Even nickel is in full recovery again. Volumes fell sharply following the LME’s market suspension and trading cancellation in March 2022. Last month, activity doubled from the previous year, and volumes were the highest since February 2022.
However, this is not exclusively a London phenomenon.
Its US counterpart, CME Group, saw record copper volumes on futures and options contracts in April.
The Shanghai Futures Exchange (ShFE) saw renewed activity last month, after a mediocre first quarter.
Industrial metals are once again in the sights of investors, and the world’s three largest metal exchanges are all benefiting from it.
CONTINUE ON LME
The LME’s average daily volume rose by 35% in the first four months of the year, marking an acceleration of the growth trend that began around the middle of last year.
Activity at the 147-year-old exchange, owned by Hong Kong Exchanges and Clearing (HKEX), has declined every year between 2019 and 2022.
Industrial metals were no longer favored by investors. The lack of engagement was compounded by a loss of confidence in the LME following the nickel crisis in 2022. Average daily volumes fell 7.6% that year compared to 2021.
The UK High Court justified the LME’s decision to cancel nickel trading in a ruling issued in November 2023. This decision and the exchange’s accelerated processing of new nickel marks is causing a surge in activity.
Nickel futures volume totaled 1.34 million contracts last month, compared with a monthly average of 1.33 million throughout 2021. Options volume of 195,423 contracts represented the highest monthly total since May 2014.
It’s not just nickel.
Lead volumes increased by 52% year-on-year in January-April, zinc by 44%, tin by 42%, aluminum by 34% and copper by 24%.
Copper’s relatively low growth rate reflects that activity began to accelerate earlier in this market than in other LME markets.
In fact, copper is currently the star of the base metals market.
COPPER SHINES WITH A THOUSAND FIRE
Three-month LME copper has risen 25% since February and is now trading above $10,000 per metric ton for the first time since April 2022.
This movement was driven by investors betting on the combination of an improvement in global production and an increase in demand linked to the energy transition.
Funds increased long positions in the CME copper contract to 132,622 contracts, according to the latest Commitments of Traders report, the highest level since January 2018.
However, short positions are significantly higher than at that time, reflecting greater bilateral speculative activity in the market.
This is reflected in the trading volumes on the three metal exchanges.
LME copper volumes, including options, passed the four million lot mark last month for the first time since June 2016.
CME futures activity crossed four million contracts for the first time ever, while the US exchange’s monthly options saw volumes nearly quadruple year-over-year to 404,739 contracts in April.
New monthly records were also set for CME’s new micro copper contract and its weekly options series.
China was also invited to the copper festival.
ShFE saw copper futures activity more than double year-on-year to 6.3 million contracts in April, while options activity set a new monthly record of 2.5 million contracts.
TURNOVER IN SHANGHAI
Trading activity fell on the ShFE base metals chart during the first quarter of this year as China’s protracted property crisis cast a shadow over the industrial metals sector.
However, April marked a sharp trend change, with volumes up year-on-year for all six base metal contracts.
Copper was the best performer, but zinc volume was up an impressive 76% year-on-year in April, nickel volume was up 61%, aluminum was up 59% and lead was up 55%.
In comparison, the ShFE steel reinforcement contract had an eleventh consecutive month of contract activity in April, with volumes down 24% during the first four months of the year.
The hot-rolled coil contract performed better, but volumes remained at the same level as in January-April.
The differences between ferrous and non-ferrous metals contracts suggest that Chinese investors are distinguishing between metals most exposed to the struggling real estate sector and those linked to new energy sectors, such as solar panels and electric vehicles.
RAW MATERIALS BACK IN FASHION
The rush into the base metals sector is not isolated. Investors also invested in gold and, to a lesser extent, silver.
Commodity exchange-traded funds, which tend to be dominated by retail investors in precious metals, are currently valued at $392 billion, slightly below record levels reached in early years, according to Citi analysts days after Russia’s invasion of Ukraine.
The bank estimates that more than $30 billion in funds have flowed into the commodities sector since the start of the year. Total assets under management rose 7% month-on-month and 11% year-on-year to $767 billion in April.
The precious metals and base metals sectors currently account for the lion’s share of this speculative enthusiasm for durable goods.
The LME, eager to consign two difficult years to the history books, can only hope the trend continues.
The opinions expressed here are those of the author, a columnist for Reuters.
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