LME finds Russian Sanctions Come with An Aluminium Twist

Commodity

Summary:

It didn't take very long for someone to work out a way of making money from the London Metal Exchange's (LME)...

It didn't take very long for someone to work out a way of making money from the London Metal Exchange's (LME) new rules around Russian metals.

The U.S. and UK governments announced on Friday April 12 a new sanctions package, which prohibited either the LME or CME exchanges from accepting deliveries of Russian metal produced after that date. The LME duly updated its rule-book on April 13, suspending deliveries of new Russian metal.

When trading resumed on the Monday, someone cancelled 79,875 metric tons of aluminium, equivalent to around a sixth of LME registered inventory.

By the end of the week a total 172,500 tons had moved to the cancelled category, draining warranted stocks to 152,000 tons, the lowest level in almost two years.

Given that Russian brands accounted for more than 90% of all LME-registered aluminium at the end of March, this is clearly Russian metal on the move.

The LME had warned about the potential for large amounts of Russian metal to enter exchange warehouses not to exit it.

But the exchange's warehouse system comes with its own kinks, particularly when it comes to storing aluminium.

Russian Splits

The latest sanctions package is intended to hit Russia's export revenue from sectors that account for 5.5% of global aluminium supply, 4.0% of copper supply and 6.0% of nickel.

Any metal produced after April 12 should in theory trade at a discount to the LME price since it is now non-deliverable.

But as well as splitting Russian metal between old and new production, the sanctions split older production into two categories of LME warrant.

Russian aluminium already on warrant on April 12 was subject to delivery restrictions but those have now been lifted. What the LME calls Type I Russian warrants can circulate freely through the LME system and be loaded out for physical delivery.

Russian metal produced before April 13 can still be warranted but such Type 2 warrants will come with restrictions on UK and U.S. entities and citizens being able to cancel, re-warrant, shift locations or take delivery for their own account.

It's worth noting that there were 737,000 tons of aluminium sitting in LME off-warrant storage at the end of February. Some, possibly most, of this shadow stock will be Russian metal.

What was cancelled last week were Type 1 warrants. The metal could return to the LME and be re-warranted subject to the exchange's audit trail requirements.

More likely it will return and be re-warranted as Type 2 material. Or it will be replaced with shadow stock, which will also become a Type 2 warrant if delivered onto exchange.

Either way, Type 2 warrants are more likely to stick in the LME system given the restrictions around taking physical delivery.

Storage Split

That would be very good news for whoever is warehousing the stuff, since there is nothing a warehouse operator loves more than metal that isn't going anyway any time soon. The longer it stays in the shed, the more revenue the storage provider gets.

And whoever re-warrants what's just been cancelled or replenishes it with off-market metal can earn a share of that revenue.

So-called "ever-green rent arrangements" allow for a split in future storage revenue between the warehouse and the entity delivering the metal.

They are regularly used by warehousers to attract metal to their storage space. They have the advantage of being cash-flow neutral, allowing smaller players to compete with bigger operators, who can pay a cash incentive to drag metal out of the physical supply chain.

But they have also been a bone of contention for many years, generating LME stocks churn as new owners are forced to move metal between warehouses to free themselves from the rental share deal with the party that originally delivered the metal.

The LME decided to continue allowing them, albeit with some tweaks, after a 2019 consultation on warehousing reform.

Recent large movements of lead and zinc stocks through the LME system are almost certainly as much a function of warehousing as metal dynamics.

Aluminium has always been the primary battleground in the LME storage wars. It's a bigger market than any of the other base metals traded on the LME and it's prone to periods of persistently high stocks.

It was aluminium that caused the LME headaches 10 years ago in the form of long load-out queues from Detroit.

It looks like aluminium is now going to cause more trouble as warehousers and traders capitalise on the Russian warrant split. LME finds Russian Sanctions Come with An Aluminium Twist_1

LME finds Russian Sanctions Come with An Aluminium Twist_1

Turbulence

The sharp reduction in LME live aluminium tonnage has inevitably caused turbulence across the front part of the curve.

The LME cash-to-three-months spread was valued at $46 per ton contango at the close on Friday April 12. It has since swung into the sharpest backwardation since June last year. The cash premium was valued at just over $27 per ton at Monday's close.

A one-day short position roll, known as "tom-next" on the LME, cost over $25 per ton at one stage Monday.

The outright price seems unsure what to do. There was a knee-jerk spike to a 22-month high of $2,728 per ton on the sanctions news but the gains were lost by the end of the day. Last week saw three-month metal rally again but the move reversed at Monday's high of $2,688 and has slid back to $2,590 on Tuesday morning.

The UK and U.S. governments were hoping that by allowing older Russian metal to continue trading, they would avoid a drain on stocks and any resulting price turbulence.

They didn't allow for the fact that after years of gaming the LME's labyrinthine rules around load-out queues, both aluminium traders and warehouse operators are primed to spot any regulatory gap, however narrow.

It's a high-risk game given both governments' interest in seeing the sanctions take effect without market distortion.

But the game is definitely on.

Source: Reuters

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Data Interpretation

At 13:45 (UTC), the US April S&P PMI was released:

S&P Flash US manufacturing PMI was 49.9 in April, which is a record low in 4 months, compared with the expected 52 and the previous value of 51.9.

S&P Flash US services PMI was 50.9 in April, which is a record low in 5 months, compared with the expected 52 and the previous value of 51.7.

S&P Flash US composite PMI was 50.9 in April, which is a record low in 4 months, compared with the expected 52 and the previous value of 52.1.

Flash S&P manufacturing US PMI output index was 51.1 in April, which is a record low in 3 months, compared with the previous value of 54.

According to the latest PMI report, US business activity continued to expand in April, but the pace of expansion slowed, mainly as demand showed signs of weakness. Output growth was also the smallest so far this year, suggesting a decline in both manufacturing and services growth and orders.

Growth of economic activity in the manufacturing sector fell to a three-month low, while growth in the services sector fell to a five-month low. Both the manufacturing and service sectors saw a decline in new business. The number of new business orders fell in April for the first time in six months. In response to the decrease in orders, companies began to lay off employees for the first time in nearly four years. Business confidence fell to its lowest level since November last year.

Some service providers said that elevated interest rates and high prices had restricted demand during the month. Meanwhile, manufacturers often linked lower new orders to inflationary pressures, weak demand, and sufficient stock holdings at customers.

Concerns about their ability to secure new orders dampened firms' confidence in the year-ahead outlook for business activity in April. Business sentiment dipped to a five-month low but remained positive overall amid hopes that market conditions will pick up.

At the start of the second quarter, inflation moderated generally. Input costs and output prices have risen slowly at the composite level. However, manufacturing input cost inflation reached its highest level in a year.

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Alex

Economic

Stocks

The chief executive of Norway's gigantic sovereign wealth fund on Tuesday said there is "clearly a lot of froth" in the tech sector, suggesting that whether there is too much of it could depend on this week's tech earnings bonanza.

U.S. tech behemoths including Tesla, Meta, Microsoft and Google parent Alphabet are all scheduled to release results in the coming days.

Big Tech's earnings, which kicks off with Elon Musk's EV company Tesla on Tuesday after market close, follow a 5.5% fall for the Nasdaq Composite last week.

The slump of the tech-heavy index reflected its worst weekly performance since November 2022, with computer chipmaker and artificial intelligence darling Nvidia leading the losses.

"Using social psychology in investing is very, very interesting, because we look at how you make decisions, how you [make] unbiased decisions, your appetite towards risk and so on," Nicolai Tangen, CEO of Norges Bank Investment Management (NBIM), told CNBC's "Squawk Box Europe" on Tuesday.

"If I look at what we can read out of the current market, I would say that there is clearly a lot of froth within the technology sector. Whether it is too much or not, that is unclear — and I guess we will get the answer later in the week when we get all these results coming through."

NBIM manages the so-called Norwegian Government Pension Fund Global. The world's largest sovereign wealth fund, which was valued at 17.7 trillion kroner ($1.6 trillion) at the end of March, was established in the 1990s to invest the surplus revenues of Norway's oil and gas sector.

To date, the fund has put money in more than 8,800 companies in over 70 countries around the world, making it one of the largest investors across the globe.

Norway's wealth fund on Thursday reported a first-quarter profit of around $110 billion, buoyed by robust returns on its investments in technology stocks.

Trond Grande, deputy CEO of Norges Bank Investment Management, told CNBC at the time that recent weakness for some of the so-called Magnificent Seven U.S. tech giants showed that investors appeared to be taking "a more nuanced look" at these companies and their business models.

The Magnificent Seven include Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla.

Asked when the fund would consider stepping back from semiconductor firms such as Nvidia, particularly amid oversupply concerns, Tangen replied: "I don't have a very, very strong feel for whether Nvidia is overvalued."

He added, "It is an incredible company with amazing technology, really in the lead when it comes to the chip sector."

Source:CNBC

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FastBull Featured

Data Interpretation

At 10:00 EDT, the U.S. Department of Housing and Urban Development (HUD) released its latest new residential sales data:

U.S. new residential sales for March reached a seasonally adjusted annual rate of 693,000.

U.S. March new residential sales rose by 8.8% from a month earlier.

U.S. March new residential sales increased by 8.3% from a year earlier.

Interest rates rose last month, but new residential sales still increased in March due to the limited inventory of existing homes. However, the pace of new residential sales will come under pressure in April as mortgage rates rose above 7% this month, which may slow residential sales and increase the use of builder sales incentives this spring.

The inventory of new single-family homes remained high at 477,000 units in March, up 2.6% from February. At the current pace of construction, this represents an 8.3-month supply, which has been supported by the ongoing shortage of resale homes.

The supply of existing single-family homes represents only 3.1 months' supply in March, with a balanced market holding 5 to 6 months' supply, indicating a tight supply.

The median new home sales price in March was $430,700, and the average sales price was $524,800.

Housing inflation remains the biggest obstacle to lowering inflation at this time. More housing supply will eventually curb the growth of housing inflation and lower interest rates.

New Residential Sales

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Cohen

Economic

Argentina's libertarian President Javier Milei is revving up his attack on the country's deep fiscal deficit, doubling down on "chainsaw" spending cuts and "blender" austerity that squeezes purchasing power - and he hopes brings down rampant inflation.

The embattled country, facing drained central bank reserves and annual inflation nearing 300%, posted a third straight monthly fiscal surplus in March, a reflection of Milei's laser focus on cost-cutting since taking office in mid-December.

"Zero deficit isn't just a marketing slogan for this government, it is a commandment," Milei said in a speech on Monday night, touting a rare first-quarter surplus that he said was last achieved in 2008. Argentina, once a global economic power, has had 113 annual deficits in the last 123 years, he added.

"The fiscal surplus is the cornerstone from which we will build the new era of prosperity in Argentina."

Milei, an economist and political outsider who snatched a shock election win last year with regular campaign rallies wielding a chainsaw as a symbol for his planned cuts, now faces a race against time to turn the economy around.

Voters, angry after years of economic malaise under left and right governments, seem for now willing to give Milei a chance, but tensions and protests are starting to simmer, with a major anti-government march on Tuesday over education budget cuts.

Markets and investors meanwhile cannot get enough of him. Bonds and equities are flying, driven by hopes Milei will indeed stick with his fiscal tightening to improve state finances, despite push-back from opposition lawmakers and on the streets.

"Argentina's better-than-expected budget figures at the start of the year are undoubtedly good news and show that fiscal adjustment is occurring more quickly than we'd expected," consulting firm Capital Economics said in a note.

It cited government spending that had in some areas been "cut to the bone" and argued high inflation was also helping trim government spending in real terms - an effect often known as "licuadora" in Argentina, the Spanish word for blender.

A recent tongue-in-cheek advertising campaign for a chainsaw and blender combo caught fire on social media in Argentina, with Milei and his advisers posting supportive images of the deal.

"That said, many of the factors that have helped to flip the primary balance back into surplus are transitory and will fade over the coming months," Capital Economics added. Argentina's Milei Revs Up Chainsaw and Blender in Fiscal Deficit Attack_1

Argentina's Milei Revs Up Chainsaw and Blender in Fiscal Deficit Attack_1

MILEI: Miracle Or Mirage?

Markets nonetheless have celebrated. Bonds have risen near 60 cents on the dollar from lows near 20 cents in the last year, while the country risk index is at its lowest since 2020. The feeble peso has gained some strength and reserves recovered.

Meanwhile, however, economic activity, consumption, and manufacturing have tanked, while poverty levels are rising and real wages falling, risking a flare up of social tensions despite Milei's support levels remaining relatively high.

The International Monetary Fund (IMF), which has a major $44 billion loan program with Argentina, has cheered Milei's success, but cautioned economic imbalances remains and the government will need to protect the country's most vulnerable.

"For some Milei is a miracle, for others it's just a mirage," said an analyst at a foreign private bank in Buenos Aires asking not to be named.

"The truth is that the progress of macroeconomics is starting to give results, but it will be urgent for this to spill over into microeconomics because social tensions are just around the corner."

Source: Yahoo

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Glendon

Economic

Natural gas, a clean-burning fossil fuel, plays a crucial role in global energy production. Today, the natural gas market presents a complex picture, with both bullish and bearish factors at play. Let's delve into the current state of natural gas, exploring recent trends, key drivers, and potential future scenarios.

Current Market Snapshot

Price: Natural gas prices have experienced some volatility in recent weeks. On May 6th, the benchmark Henry Hub natural gas price in the United States sits at $2.14 per million British thermal units (MMBtu) [Markets Insider]. This reflects a slight decrease from earlier in the year.

Supply and Demand: Natural gas supply in the United States has dipped slightly compared to previous weeks [U.S. Energy Information Administration (EIA) Weekly Update]. This decrease is partially offset by lower consumption due to warmer weather.

Geopolitical Landscape: The ongoing war in Ukraine has disrupted global energy markets, leading to a surge in demand for liquefied natural gas (LNG) from the United States. This could potentially put upward pressure on natural gas prices in the long run.

Factors Driving the Market

Weather: Warmer weather across the United States has led to a decrease in natural gas demand for heating purposes. This has contributed to the recent price dip.

Production Levels: Natural gas production in the US has remained relatively stable but could fluctuate depending on drilling activity and rig counts.

Global LNG Market: The European Union's efforts to reduce reliance on Russian gas have significantly increased demand for US LNG exports. This could lead to higher prices in the future.

Storage Levels: Current natural gas storage levels in the United States are slightly below the five-year average [EIA Weekly Update]. Lower storage levels can contribute to price volatility during periods of peak demand.

Looking Ahead: Potential Scenarios for Natural Gas

The future trajectory of the natural gas market remains uncertain. Here are some potential scenarios:

Bullish Scenario: A hotter-than-expected summer in the US, coupled with sustained high global LNG demand, could lead to price increases. Additionally, significant disruptions to Russian gas supplies could further tighten the market.

Bearish Scenario: A mild summer and increased domestic natural gas production could lead to a decline in prices. Technological advancements in renewable energy could also dampen long-term demand for natural gas.

The Importance of Natural Gas in the Energy Transition

Natural gas is often viewed as a "bridge fuel" in the transition towards a low-carbon economy. It burns cleaner than other fossil fuels like coal and can help displace more polluting sources of energy generation. However, concerns remain regarding methane emissions associated with natural gas production. Technological advancements in carbon capture and storage could be crucial for mitigating these environmental concerns.

Conclusion: A Market Ripe with Opportunity and Challenges

The natural gas market presents a complex and dynamic environment. Understanding the interplay of various factors, from weather patterns to geopolitical tensions, is vital for stakeholders across the energy sector. While short-term price fluctuations are likely, the long-term outlook for natural gas hinges on its role in the global energy transition and the development of cleaner production technologies.

To stay updated on all economic events of today, please check out our Economic calendar

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Samantha Luan

Economic

Forex

Japan is on the brink of currency intervention if the yen weakens any further, according to one of the country’s former top currency officials.

“Amid no change in US and Japan interest rates, the yen has depreciated against the dollar quite rapidly,” said Mitsuhiro Furusawa, former vice minister of finance for international affairs, in an interview with Bloomberg on Tuesday.

“Should this trend continue, intervention will come,” Furusawa said, adding that “we are very close.” He cited market reaction to US data as a factor that may nudge Japanese authorities to act and pointed to last week’s joint statement between Japan, the US and South Korea as an indication that Tokyo’s allies won’t stop it entering the market.

The comments from the former finance ministry official come with Japan’s currency close to Tuesday’s fresh 34-year low of 154.88 against the dollar. Finance Minister Shunichi Suzuki reiterated Tuesday that authorities are prepared for action to address the situation.

The yen continues to look vulnerable with a Bank of Japan meeting this week and the Federal Reserve’s preferred gauge of inflation due out later on Friday.

Furusawa sees the possibility of the BOJ raising interest rates again as early as July, but, like almost all economists surveyed by Bloomberg, he expects no rate change on Friday.

Market participants and policymakers are wary that the widely expected stand-pat decision on Friday after last month’s historic rate hike may trigger another slide in the currency.

Allowing market players to push the exchange rate can’t be tolerated, Furusawa said. “No one thinks it’s a good idea to leave speculators unchecked,” he said.

Furusawa expects Japan’s authorities to step into the market before the currency reaches 160 yen to the dollar. Some market participants, such as Bank of America Corp., foresee the yen sliding further to 160.

Japan spent around $60 billion intervening in currency markets in September and October of 2022 when the yen approached the 146 and 152 levels.

Last week, Suzuki issued a rare joint statement with US Treasury Secretary Janet Yellen and South Korean Finance Minister Choi Sang-mok in Washington, stating that they would continue to consult closely on foreign exchange developments. The three nations also acknowledged the serious concerns felt by Japan and Korea over the recent sharp depreciation of their currencies.

“With the statement, it’s hard to imagine the US will stop Japan if it actually takes action,”said Furusawa, while noting that the statement does not give Japan a complete go-ahead to intervene.

The main factor behind the recent weak yen is the rate differential between Japan and US, according to Furusawa, who now heads the Institute for Global Financial Affairs at Sumitomo Mitsui Banking Corp. Furusawa previously served as the finance ministry’s top currency official from 2013 to 2014 before joining the International Monetary Fund as deputy managing director.

The difference in policy rates between the two countries looks set to remain unchanged until the summer at least, with surveyed economists flagging October as the most likely month for the BOJ to move again.

Governor Kazuo Ueda reiterated in parliament on Tuesday that it’s appropriate to maintain an accommodative environment for a spell, while in the US, Fed Chair Jerome Powell and other officials have signaled that it’ll take longer to cut rates.

“A July hike is a possibility if the bank is convinced it can raise rates after the effects of the income tax rebate and wage hikes are seen,” said Furusawa, referring to a one-off tax break for households dealing with elevated levels of inflation. Unions have secured their biggest annual pay raises in decades this year starting from April.

At its upcoming meeting, the BOJ is expected to project 2% price growth in the fiscal year beginning in April 2026, partly reflecting the optimism surrounding wages and prices. If the bank does so, that may support the case for a July move, Furusawa said. The BOJ could then hike again later in the year, he added.

Weakness in the yen could also be a motive for the bank to move if that starts to affect inflation, but changing monetary to correct currency trends would be difficult, he said.

Source:Bloomberg

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LME finds Russian Sanctions Come with An Aluminium Twist

Russian Splits

Storage Split