The LME Week, the traditional gathering of the metal world in London, brought together this past week analysts, traders, bankers etc. to exchange information, share opinions, as well as decide future moves. The most significant single event during the Week is without doubt the LME Seminar, which reached this year a high audience of over 1000 delegates. The organizers of the Seminar invited some distinguished and eminent world experts to address key facts about the global economic outlook and the base metals traded at the LME. Insofar as aluminium markets are concerned, the Seminar focused mostly on trade tariffs and the US sanctions on UC Rusal – and here are some of the main points speakers touched upon:
Global Economic Outlook
The first panel was presented by Brian Coulton, economist from Fitch Ratings. Coulton argued that the picture of the world economy is actually a strong one, even if it is becoming much more balanced. Big changes are going on that will affect global markets in a couple of years in quite profound ways. Regarding global growth, three consecutive years of growth above 3% (2017,2018,2019) have been seen in the 20 largest economies. However, Coulton pointed out that we should not expect these figures to persist into the medium term. It will not happen next year, but in three years there will be definitely lower economic growth.
In the Eurozone, rising capacity utilisation points to higher Eurozone capex, but monetary conditions are still supportive of growth. However, it is no longer a synchronized, coordinated, across the board growth as seen a year ago. And that is a very important change. From the third quarter last year, Eurozone growth has started slowing down, while the US is accelerating. The fiscal easing in the US is not the biggest in its history, but it is completely unprecedented in terms of where it is coming in the economic cycle. The US has never had such a significant fiscal easing when the economy was operating on or above the trend. Nobody else is pumping up their economy at this point. Regarding China, the country is slowing down on the domestic front. The credit growth over the last twelve months has reached about minus 4 percentage points.
In a nutshell, China is slowing down, the Eurozone is slowing down, while the US is accelerating, putting more and more pressure on the Fed.
Due to ongoing US – China trade tensions, Fitch reduced China’s GDP growth for 2019 from 6.3% to 6.1%. China’s response of passing trade tariffs worth US$ 60 billion (on tariffs of US$ 200 billion) shows it really doesn’t have influence on the US economy. The biggest shock for the US economy is going to come on the price level, on the impact that the 25% duty will have on imports of US$ 200 billion, which could push up inflation by 0.3%. At the same time, the influence on US growth from China’s retaliatory measures is almost immaterial, with the export shock only amounting to around 0.1%. Fitch Ratings does not expect that US-China trade tensions will stop the Fed from hiking rates and changing those fundamentals.
Geopolitical issues in the metals market – the impact of factors such as sanctions, resource nationalism and tariffs
Jorge Vazquez from Harbor Aluminum started off by commenting on the policies of US President Donald Trump. He stated that president Trump showed consistency so far – a statement that this analyst only partially agrees with this, since a number of tariff exemptions were extended recently.
Vazquez believes that the epicentre of the current trade wars is the US and president Trump. He believes there will be consistency going forward, and that it is impressive how the administration has so far fulfilled everything that was promised. In that context, Vazquez sees a two-pronged agenda:
1. Levelling the playing field with China
2. Reviving the US industry, specifically aluminium, steel and the auto sector.
Trump has been pretty consistent in trying to accomplish that goal, and everything he has done with respect to aluminium, steel and China, falls in the above two categories. This trajectory is expected to continue, and Trump has managed (in the short term) to cause a revival of the US aluminium industry – in terms of investments and profitability. Both in primary and downstream sectors, Vazquez sees a type of dynamism that he has not seen at any point in the last 20 years. Currently, the biggest levels of growth are going on in the downstream aluminium industries (rolling mills and extrusion).
According to Vazquez, forecasting what lies ahead requires to just look back and project into the future: the policies the US will pursue boil down to blocking China, reviving the US aluminium and steel industry and leveraging Washington’s position in ,negotiating trade deals. The NAFTA agreement is an example of that.
James Kynge of the Financial Times struck a different tone and argued that not everything is so simple in these trade disputes. Speaking on the same panel, he stated that taking into account the strength of both the US and Chinese economies, trade wars will likely continue. What the US is doing at the moment is harming its own economy, and the real impact of that will begin to show through soon. Kynge pointed out that, for instance, 93% of laptops are imported from China, as are 80% of mobile phones, 94% of Christmas ornaments and 88% of toys 88%. What president Trump is actually doing by imposing tariffs is negating the positive impact on consumers will feel from the recent tax cuts. Over time, these effects will become more visible. What’s more, China is trying to shift dependence away from US companies to companies from around the world.
Discussing the UC Rusal sanctions, Jorge Vazquez argued that they are not a part of the two-pronged agenda and came as a complete surprise: they created chaos and impacted companies both in Europe and US. Vazquez further believes the sanctions will be lifted after the US midterm elections. Sanctions are affecting alumina prices, and the entire US aluminium smelting industry is dependent on alumina imports.
The Metals Debate: Speed analysis and debate
The honour of speaking about aluminium market during the panel , went this year to Natasha Kaneva from JP Morgan.
JP Morgan expects global growth of 3.2% in the fourth quarter, meaning that base metals are priced 100 base points lower than the level where they should be priced at. Indeed, base metals are currently pricing in global growth of 2.2-2.3%, rendering them pretty cheap. A 10% increase on average in the next two quarters should be expected.
While the headlines this year were dominated by developments on UC Rusal and Alunorte, the biggest surprise for JP Morgan was supply. Compared to the start of the year, the bank lowered market supply by almost 2 million tonnes for 2018 worldwide (including China), and a little over 1 million tonnes for 2019. The main reason for that development lies with the fact that the new projects planned to start production did not materialise due to high raw material costs. The margins for Chinese producers declined by 60% since their peak in April. Around 40% of global aluminium production is cash negative at current prices. As a consequence, the world is seeing significant drawdowns of inventory, especially out of China.
Looking at the fundamentals, the fair value for aluminium price is around US$ 2250 /tonne and JP Morgan sees the price going there in the next 2 quarters. In the second half of 2019 and 2020, the bank expects recession, which will be reflected on aluminium (and metals prices in general). It is therefore recommending traders get out of metals by H2 2019. Lastly JP Morgan thinks aluminium will be the secret, highest beneficiary from the electric vehicles revolution in the near future.