After nearly three years of zero-COVID policies being in-place throughout China, the country began opening-up its borders and lifting restrictions in early January.
What that could mean in the commodities world is the idea that a “sleeping giant” has awoken and could greatly impact supply demand fundamentals throughout the globe.
China typically accounts for nearly 60% of the world’s demand and production of many major commodities. Those consumption and production levels have, of course, been lesser due to a slowdown in China’s manufacturing economy.
But as rumblings of lifting restrictions began in late 2022, the price of commodities started to increase. For instance, copper prices have risen nearly 20% since November. Likewise, iron ore, of which China is one of the largest consumers, is up over 52% in that same timeframe.
Globally, the price of steel has moved upwards. The price of Chinese steel is up roughly 10% to start the year, and both U.S. and European prices have ticked up slightly as well.
Perhaps the bigger trend to watch is the fact that the pricing spread across all three regions have tightened and have collectively moved higher. As of January 11, hot-roll pricing was over $700/ton.
“As of now the expectation isn’t that prices will return to the record-setting levels we experienced in 2021 and into early 2022. But it certainly does appear that we have seen the bottom with regards to steel prices and we are headed for some upside in the coming months,” says Nick Webb, Ryerson’s director of risk management, commodity hedging.
A New Nickel Trader in Town?
When smaller volumes begin making large impacts, it opens the door for alternatives to enter the discussion. This looks to be case within the nickel market.
Let’s rewind to March 2022. A short squeeze on the price of nickel on the LME (London Metal Exchange) caused prices to spike to record levels and subsequently suspending trading for more than a week. Since that time, nickel traders have been reluctant to return to the LME.
Nickel open interest data (which measures the volume traded on the LME nickel contract) suggests that approximately 38% of the market has not returned to trading nickel on the LME since the short squeeze.
For all intents and purposes, this would be fine if not for the fact that it seems that the price of nickel has been extremely volatile—making major moves based on smaller volume of trades.
-November 2022: Below $10/lb.
-December 2022: Just above $15/lb. 50% move on very little trading volume and no news
-January 2023: Hovering around $12/lb.
This could be opening the door for an alternative to trading nickel on the LME. The alternative may be UK-based GCH (Global Commodities Holdings). In early January, the company, which currently runs a coal-trading platform, announced plans to open a physical nickel trading platform as early as February.
This could signal good news for buyers of stainless steel or manufacturers of EV batteries, who have seen the price of stainless influenced by the volatility in nickel prices over the past 10 months.
Aluminum: A Tale of Two Pricing Factors
The price of aluminum factors in both the production cost and the premium cost, and while we are seeing some softening in the former, it is being offset by a rise in the latter. This has resulted in stable aluminum prices to open the year.
First, on the production side, aluminum ingot prices have begun to soften, hovering around $1.10/lb. This is due in some part to falling energy prices, due to warmer weather conditions around the globe.
However, on the premium side, Midwest Premium prices are up roughly 20% to start the year, currently at around 25 cents/lb. This increase could be influenced by a few different factors:
1. The Midwest Premium price tends to ebb and flow with the flat-bed truck demand index. Currently, this index has been moving slightly higher, driving up the price of the Midwest Premium.
2. As with the nickel market, premium markets tend to be niche, comprised of a few players who set the price and report to the index.
In the video clip below, Nick Webb speaks to the second point and the impact it could be having on Midwest Premium prices in the coming months: