Pandemic plays havoc on metal markets
During the first half of 2020 the coronavirus pandemic took over the world’s attention, taking center stage nearly everywhere and impacting every industry - including industrial metals from aluminium to zinc. Before the unpredictable outbreak of COVID-19 there had been a lot of talking about a zero-carbon future. Companies came up with future targets to reduce their carbon footsteps, all running in a kind of beauty contest for lower or zero emissions. The electrification of transport, be it electrical cars, lighter trains or different aeroplanes, was expected to kick off a decade of increasing demand for metal. Countries like Britain jumped on the band wagon with a plan to ban the sale of all petrol-, diesel- and even hybrid cars by 2035.
But the COVID-19 storm brought dramatic changes. Instead of an increase in production of electric vehicles China, by far the biggest player in the field, saw a steep decline already in first three month this year. The world’s car industry put the ambitious all-electric-vehicle-plans on hold. Even worse, the industry slowed down altogether, pausing production in main-stream plants producing cars with traditional internal combustion engines, too. Chinas car output was 49 per cent lower in March 2020 than in March a year earlier, whilst in Europe car production slumped due to temporarily factory closures. The weak demand brought some downward pressure on metal prices - including those for aluminium. Currently, this bespoken light-weight-metal seems to loose out. But just the same could be said of lots of others industrial metals, too, none of them showing the predicted, expected or just hoped for price increases.
Matthew Chamberlain, the CEO of the London Metal Exchange (LME), the oldest and still one of the world’s most important metal exchanges, sees the pandemic as a kind of Litmus test, showing how robust the business continuity procedures are. For the first time since World War II, the famous Ring with its traditional open outcry method of price findings had to be closed down totally due to the virus infection risks. The LME was rather lucky insofar as the Exchange had run a few months before a lengthy trial, in which the nickel price was calculated electronically instead of by open outcry in the LME Ring.The aim was to find out, whether this electronic pricing would work and could serve as back-up-facility. Contrary to some rumours, neither Chamberlain nor the LME Board ever had the idea to close down the ring permanently. Even the tests rounds before the outbreak of COVID-19 showed, that the LME did not get more business by electronic trading, but a lot more by increasing the Ring-trading-times, which was tested at the same time.
But when the Virus came and the LME had switched within a week from the open outcry as pricing basis to the electronic pricing it worked nicely. Chamberlain rather proudly stresses: “The LME’s pandemic plan enables it to continue to serve the metals and financial community with all its businesses available”. The LME Ring will be reintroduced again when the Virus is either killed or tamed, but surely not as long as the British Governments rules about the so called “social distancing” are in place. But in the meantime the Exchange will have gained a world of real-life-experience in electronic pricing.
Fundamentally, the future for aluminium still looks bright. The never rusting metal has a lot of advantages besides its low weight. Most of the world’s biggest aluminium companies now have taken to use hydropower or other low carbon emitting energy to produce the primary metal and sophisticated recycling systems have made scrap one of the highly sought-after resources. For Chamberlain, these advantages will be triggering future demand. But he is just as well sure, that just like for other metals “there is always a tension between the longer term outlook and short term technical factors. This difference between the longterm view and the shorter view makes the metal markets so fascinating.”
Trade in LME aluminium and LME aluminium alloy picks up again
The LME enables trading the fullest aluminium range of all the world’s international metal exchanges, having added LME Alumina contracts in March 2019, starting to trade lots of 50 metric tonnes from April 2019. The double than usual lots, were chosen because it takes two tonnes of alumina to produce one tonne of aluminium. Alumina trading started with high prices of more than 400 US-Dollar (US$) in April last year falling deeply to the lower 200 US$ range in April 2020 and showing forward a strong upward movement again from May this year. Although trading in LME Aluminium and LME Aluminium Alloy started to pick up in April and volumes over the whole range increased, prices stayed volatile on the rather low end. Nothing to worry about for Chamberlain as long as the LME is “maintaining a stable and orderly market” whilst “placing the utmost importance on managing the health and safety of its staff, its Ring dealing member teams and the wider community”.
Author: Katharina Otzen-Odrich / London