LONDON/HANOI- Industrial Metals Trading volumes have fallen across the world and can drag moreover, as economic threats from rising interest rates and war in Ukraine sideline buyers, particularly in major consumer China.
Aggressive interest rate hikes have fueled genuine concerns about the impending recessionwhile confidence is still shaken after the sharp price swings in the first quarter following Russia’s invasion of Ukraine.
Trade volumes of copper fell by up to a third on overall commodity exchanges so far this year, and those of most other industrial markets metals also slumped, with nickel being the hardest hit.
Declining appetite for industry metals is a bad omen for overall economy, for which “Doctor Copper” – nicknamed for its widespread use in industrial processes from construction to energy and manufacturing – is considered a key indicator.
Although the relationship is complicated by other factors such as exchange fees and margins, a comparison of copper volumes with both overall growth and manufacturing show correlations that analysts have estimated at 60-80%.
“It is clear that the threat of recession may well play a role in participants seeking to reduce their exposure to metalssaid independent consultant Robin Bhar.
China hardest hit
Trade in China, the world’s largest producer and consumer of commodities, has seen one of the biggest erosions in activity, copper volumes on the Shanghai Futures Exchange (ShFE) down 33% so far this year through August.
In addition to an economic crisis and a real estate crisis, the Chinese government has taken a hard line on COVID-19 infections, imposing severe closures in the country’s commercial hub, Shanghai.
People were reluctant to make big business decisions during the lockdowns, said Tiger Shi, managing director of BANDS Financial in Hong Kong. “The lack of face-to-face interaction has hindered company employees from developing trading strategies,” he added.
“Another (factor) is the downturn in the economy. Everyone takes a more conservative approach.
Some copper exchanges in China have switched to a new international copper contract on the International Energy Exchange (INE) in Shanghai, but that is only a small part of the drop in the ShFE, traders said.
INE volumes gained 819,288 tonnes so far this year, but ShFE business fell 74.4 million tonnes
Funds stay on the sidelines
The US Comex market is favored by funds and speculators, but their mistrust has averaged daily volumes copper skid 21 percent in the first eight months of the year.
“The macro signals you to sell or short, but you would be very cautious due to the ability of a short market to hit back,” Bhar said. “You might lose your shirt.”
Many investors are bullish on copper in the long term due to expected growing demand for electric vehicles and renewables, but are holding back in the short term, said Tom Nelson, portfolio manager at Ninety One.
“Very near-term copper is very well supplied, so you can be very bullish on copper for the energy transition, but hold back for a year or two due to near-term supply trends.”
Physical activity strengthens LME
volumes also declined on the LME, the world’s oldest and largest market for metalsbut in most cases it outperformed its American and Chinese rivals.
The LME’s status has held despite a spike in nickel prices in March that forced the exchange to suspend trading and reverse billions of dollars in trades, angering many investors and triggering lawsuits.
With confidence undermined, nickel activity was the most affected, with the LME volumes down 17% so far this year, although still less than on the ShFE, where they have fallen 70%.
The dramatic decline is due to the fact that the Shanghai contract did not establish itself as a overall benchmark, and there has been a lack of arbitrage opportunities since the LME contract has not been opened during key Asian trading periods since the March crisis.
The LME data shows that many participants have exited the nickel market, a trend that several traders believe is likely to continue, leading to an even steeper decline. volumes and more volatility as more people choose to trade prices directly.
Copper volumes at the 145-year-old LME, down only 6% year-to-date, held up better than ShFE and Comex as its core business relies on physical flows, including miners and users industrialists, said Marc Bailey, managing director of broker Sucden Financial in London.
“The LME is strongly underpinned by traditional trade flows. These flows are going to be there, even if they are going to be less because the economic activity is less,” he said.
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