Goldilocks beats well tanned

Commodities are rising again on the popularity scale
After a rather subdued start for nickel on the London Metal Exchange (LME) at the beginning of the year, since the middle of February a general upwards trend has been evident. However, this has not been exactly linear, as it has also been characterised at times by considerable setbacks. As commented in the April edition, hopes and doubts are in a battle together about the future economic development. Recently, and with increasing scepticism about a quick decision on interest rate drops in the USA, it did seem that at the end of April / beginning of May, the price levels that had been reached could be endangered once more. The slow recovery in China, the already weak economy in Europe and in addition a softening economy in the USA all contributed to a spread of disillusionment.

The change was then suddenly brought about by a rather unexpected exogenous event, namely turbulence in the copper market (see also below) on the Chicago Mercantile Exchange (CME). This pushed up the price not just in Chicago but also in London through arbitrage and speculative interest. And since the industrial metals cannot be viewed in isolation from one another, not only did copper rise quickly and strongly upwards, but also prices for aluminium and nickel in London.
Even if the reason for nickel was attributed to the unrest in New Caledonia (also see below) where President Macron even became involved, it was actually obvious that it was more because of an exaggerated spill-over from the copper market. Therefore, it was almost to be expected that the nickel price, after a short high of USD 21,750/mt would quickly make a correction in the direction of USD 20,000/mt.

These developments, by the way, also show that not only on the LME but also on other Exchanges such as the CME, short term turbulence can also occur in relatively tight individual entities and segments. In this respect, the silence at the time by representatives of the CME on the question of whether the CME could rule out developments like those on the LME was honest. On the other hand the idea of the CME and some partners at the time, but still not yet realised, that the LME nickel market could be overtaken was unnecessary. The dramatic “mistake” of the LME in 2022 was simply that the reaction came too late and important safety instruments (partly even at the wish of market participants) were missing. However, the LME has learnt from this and the Exchange has been made much more secure in the meantime.

On the whole, commodities are popular once again with investors. According to reports, Citibank estimates that investment funds have invested about USD 30 billion in the commodity sector so far this year. The biggest share is in precious and industrial metals. And in fact, data of the LME shows over 17 million contracts were traded in the month of April, making this a new record month.

Also, nickel is “back in the game”. In comparison to the previous year the traded volume has doubled and has, therefore, reached the level of February 2022, in other words, “pre-crisis level”. As a reminder: in March 2022 after the outbreak of the Russian-Ukraine conflict, nickel prices were out of control until the London Exchange finally had to suspend trade and even make some trades null and void. However, the current figures and trade volumes do, in the meantime, point to a sufficient amount of confidence once more.

Currently the nickel cash price is again over USD 20,000/mt. The price had last been at this level in September 2023. This latest price rise can, on the one hand, be traced back to an increased investment interest, already mentioned above. On the other hand there were also news reports about the unrest in New Caledonia which pushed the speculative momentum.

For companies planning in the real economy (which have a connection to metal exchanges) it would be natural for them to prefer to have a Goldilocks economy. What, never heard of this? The Goldilocks economy describes the perfect economic middle. Raw material prices, but also the growth of the global economy, are therefore neither too high nor too low. Growth is slightly over the long term average. Inflation is also low. Therefore, it could be said, somewhat lukewarm. But, however, this is not how the world is. Volatility belongs to business and successfully dealing with this is rewarded by a resulting profitability.

And the next exogenous event with unforeseeable consequences is already casting its shadow. There are currently signs that the European Central Bank (ECB) with its always well tanned President could cut key interest rates before the USA does. What a wonderful world!

Where is New Caledonia?
New Caledonia is a French overseas territory and an archipelago, approximately 1,500 miles east of Australia in the South Pacific. French is spoken, French wine is drunk and payment is made with an overseas Franc, which is linked to the Euro. In the world of nickel, New Caledonia has a pioneer role: the first nickel deposits were found in this island territory in 1864 and in 1880 the “Société Le Nickel” (SLN) was founded and mining and smelting began. The French mining company ERAMET is a major shareholder today in SLN with a 56% stake.

The main mineral source of New Caledonia is nickel; the archipelago is recognised as having the fifth largest nickel reserves worldwide. In regard to nickel production approximately 6% of nickel extracted from ore mined in 2023 came from there. Therefore New Caledonia is in third place. Part of the ore goes into export: to China, South Korea, and Japan. Another part is for domestic processingBesides SLN that produces ferronickel, there are two other local companies: Koniambo Nickel SAS (KNS), in which the international trade and mining company Glencore holds a 49% share, and Prony Resources New-Caledonia (PRNC), also a ferronickel producer, in which the trading company Trafigura holds a share of 19%. PRNC acquired the hydrometallurgical nickel and cobalt refinery from the initial investor Vale in 2021.

All three companies do, however, suffer from high production costs and have been stuck in a crisis for years. So far, they have been subsidised by investors and even the French State, which, according to reports, subsidised them to the amount of around EUR 700 million between the years 2016 to 2023. Glencore has already pulled the plug: the group announced in February that operations would cease and it is open to offers. It is also thought that PRNC is seeking new strong investors.

The outbreak of unrest in mid-May, which has, so far, also resulted in deaths, shows the difficult political environment in which producers and investors must operate. Seen in the global context, however, this and the current extended standstill in mining activities do not have a serious impact on fundamental data nor cause a shortage in the market.

Short Squeeze!
A “short squeeze”, albeit to a smaller extent than the nickel crisis of 2022, was seen in the copper market in mid-May. The American metal exchange COMEX, a subsidiary of the Chicago Mercantile Exchange (CME) had quotes for copper futures up to USD 1,200/mt higher than the corresponding futures on the LME. Copper had recently broken through the USD 10,000/mt barrier there. Normally, there are only marginally differences of up to a maximum of USD 150/mt premium on the COMEX side between the two exchanges, according to analysts at BNP Paribas Bank.

Reason for the present delta: after an increase of the premium to over USD 200/mt, market participants had expected an alignment. However, this did not happen, and simultaneously physical metal was withdrawn from COMEX warehouses which caused prices to rise further. The trading houses of Trafigura and IXM, according to Reuters, are now actively bringing copper to COMEX in order to cover their short positions. The analysts of BNP Paribas Bank in their research stressed that whilst copper can account for a bullish demand story, the price development on COMEX is not an indicator of the threat of a physical copper shortage.

Farewell to an old friend: The “Cr-Benchmark” is being retired.
Introduced in the 1980’s and now, after about 40 year’s service, it is being retired: the European ferrochrome benchmark price. The end of this price reference, in use for several decades, was recently announced by Merafe Resources, a ferrochrome producer listed on the Johannesburg Exchange and partner of Glencore. Therefore, there will be no new indicator and no new reference price for the third quarter. This gives a good enough reason for the authors to look a little at the history.

A look back at the 80’s: the stainless steel industry is flourishing, and Europe is the leading production region with a broad steelworks landscape and the biggest global consumer of ferrochrome with a share exceeding more than 40%. At the time South Africa was the biggest producer, responsible for a good third of ferrochrome production, as over 80% of all known chrome ore reserves worldwide were to be found in South Africa and neighbouring Zimbabwe. At this time the European ferrochrome benchmark was created and very soon took over the role as a reference price for chrome in the global ferrochrome and stainless steel sector.

Ultimately, this value represents the result of negotiations between the biggest producers and consumers. In the stainless steel industry, the benchmark price also influences the calculation basis of the stainless steel sales price via the alloy surcharge. At the time of its introduction the benchmark was around USD 0.60/lb, which, in today’s terms, adjusting for inflation would be about USD 1.50 to 1.60/lb. The last quote for the second quarter of 2024 was USD 1.52/lb.

Fast forward to the 2020’s: China replaced Europe long ago as a heavyweight in stainless steel production and ferrochrome demand, as well as surpassing South Africa in ferrochrome production. In the meantime, almost half of the annual 15 million tons ferrochrome is produced in China. South Africa is the biggest supplier of the chrome ore required for this. Along with this development China is now the biggest producer and also has the biggest market segment, and has, therefore, formed its own price methodology and policy. This in turn has a trans-regional influence. In recent years, therefore, the European benchmark price has often been called into question.

At the end of May 2024 it finally happened: the “Cr-benchmark” will be retired – it remains to be seen whether and with which new reference price it will be replaced. With the background of the general trend of many market makers, because of compliance risks and the ever present suspicion of illicit collusion carrying the threat of draconian penalties, the expectation is that there will no longer be an indicator, other than the various price publications in the more or less serious trade magazines or through price data providers.

Downcycling, recycling, or upcycling?
Recycling as a term is now an established part of our general vocabulary. In addition, there is a general widespread understanding of its definition; the EU itself specifies the term recycling in its Directive 2008/98/EG in an easily understandable way as “reprocessing operations in which waste materials are transformed into products, materials and substances, whether for the original or for other purposes”. In addition to the accepted term recycling, upcycling and downcycling are now spoken of more and more. While the term upcycling has a basic positive connotation, the term downcycling is more negative. Therefore, downcycling is often considered as something to be avoided: the Gabler Commercial Dictionary, for example, defines downcycling as a process by which the more a product is recycled, the more the quality of the recycled material diminishes.

Under the guidance of the University of Bayreuth, as part of a project sponsored by the German Federal Environment Agency, various researchers have taken on the task of sharpening and better defining the term downcycling, with the focus on the metal industry. The result is the following working definition:

“Downcycling is the phenomenon of a reduction in quality of materials in relation to their original quality (and properties), which have been processed from waste. […] Downcycled materials can be considered as recycled materials. […]”

The research team expands on this by explaining that downcycling is usually not the desired effect but it can occur as a result of or during processing. Therefore, downcycling can be caused when, for example, scrap cannot be sufficiently separated and/or contains certain impurities which in turn cannot be separated out. But a lack of demand or product design can also lead to downcycling. The research team’s concept: to better quantify downcycling by a more precise definition, so that materials can be kept in the cycle longer and with the same quality.

Source (German): Project Optimet – https://www.umweltbundesamt.de/publikationen/optimet ; Article: https://onlinelibrary.wiley.com/doi/full/10.1111/jiec.13289 ]

The authors of the Commodity News, however, raise the basic question: according to the general perception and this definition, is downcycling per se always bad? And is upcycling always good? The reality check in relation to the recycling of stainless steel scrap shows that a variety of suitable alloyed scrap can be used in order to cover the increasing secondary raw material needs of stainless steel producers. Above all, this involves the elements nickel, chrome and also molybdenum, which need to be kept in circulation. The sources for this are a number of various alloyed materials and (steel) scrap, which, unfortunately, by definition and public understanding, are considered as waste. Recycling lets these scraps become secondary commodities. And is this not what this is all about? A maximisation of secondary raw material usage, with a simultaneous reduction of primary raw material usage, results in the decrease of climate damaging gases and the avoidance of other environmental damage, which, for example, can be caused by intense (open) mining in tropical regions. With this in mind, the question of downcycling or upcycling cannot be right in respect to stainless steel scrap.