Quantamental – the best of both worlds

LME Nickel market (temporarily) in turmoil
In the early hours of the morning of the 7th March 2022 while the Asian trading session was underway, there was a serious “accident” in the nickel market of the London Metal Exchange (LME), for which, at first glance, the exchange was not sufficiently prepared. A disproportionately large short position on the exchange directly, but also over the counter (OTC), built up by a market participant with the help of brokers and banks caused turmoil. The recent increase in nickel prices, caused by supply fears in nickel due to the Russian/Ukrainian crisis had brought the dominant position so much in deficit that brokers and banks evidently got cold feet and demanded further margin calls from the position holder(s). As these were not paid immediately there was even greater unrest. Apparently, brokers and bankers began to liquidate the position in order to limit their own potential losses. In a tight market, this buying drove prices to dizzying, fully artificial heights on the 7th and 8th March. On the 8th March the LME then hit the emergency brakes and temporarily suspended LME nickel trading.

Before the nickel market gradually resumed trading on the 16th March with the introduction of narrow daily bands, according to recurring market information the financially quite powerful position holder and his banks had used the time to rectify the cause of the situation. It was no surprise, therefore, that the days following saw a decline in prices, within a daily controlled range set by the exchange, so that the market could be brought back to more stable levels. On the 21st March, the closing price was USD 31,380.00/mt. Since the market turbulence was much more than had ever been expected, criticism of the LME grew. However, it is still too early to make a judgement on the medium and long term consequences of the LME nickel price as an internationally acknowledged price reference for the industry.

Société Generale does not see a super cycle in commodities
While the US investment bank, Goldman Sachs, expects a super cycle for the commodity branch, the large French bank, Société Generale plays down the issue in an already mature, but still very interesting publication in the “Commodity Compass”. According to this, on the basis of data examined in a quantamental way, a combination of fundamental and quantitative analysis (the best of both worlds), no super cycle can yet be expected. The reasoning is that, although there is high demand for commodities from sustainability projects commodity experts do not expect any big demand in all branches as has been the case in previous super cycles. In their findings the experts are relying on data which goes back to the 1800’s. In addition, several demand situations have been modelled, taking into account various political framework conditions. The experts of the bank conclude that copper, aluminium, nickel and zinc (as well as other base metals) do not yet show a super cycle pattern. The possible short and medium term influence of the armed conflict in the Ukraine, as an exogenous shock, has of course not been taken into account in this model.

Wood Mackenzie expects global nickel consumption to double
Analysts from the research and consulting group Wood Mackenzie expect global primary nickel consumption to more than double, from 2.4 million tons in 2020 to 4.9 million tons in 2040. At the moment about 70% nickel is used in stainless steel production. By 2040, this share could drop to about 53%, since battery production for electric vehicles will take an even larger share.

The recovery in demand after the covid-19 pandemic, as well as the future nickel demand through electric mobility has supported nickel prices well throughout the whole of 2021. Already at the end of last year, the experts from Wood Mackenzie published this information and the forecast for the current year 2022 was for strong prices which would then fall again in the long term.

Without new technology the EU steel works will have used up their emissions budget 15 years too soon
The report “Steeling for net zero” by the research group “Industry Tracker” has come to the conclusion that the ten biggest steel producers of Europe, the Commonwealth of Independent States and Turkey have less than 26% of their carbon budget remaining and must, therefore, quickly change their business models if they want to reach the goals of the Paris Climate Agreement by 2050. The steel producers which have been examined have already used up three quarters of their carbon budget for 2050.

By using a higher scrap quota, some companies could extend their time frame for the changeover by two to two and a half years. The use of gas could also be considered to bridge the gap. Nevertheless, the researchers believe the next five years are going to be crucial for many companies.

European mining has the potential to improve
The European Commission has put sustainable and responsible extraction of commodities at the forefront of their commodity policy. However, the process of harmonising regulations is extremely slow.

After the 1998 breach in a tailing dam of a zinc and lead mine in Andalusia and the 2000 cyanide spill from a Rumanian dam leaking highly toxic waste material into the rivers Tisza and Danube, the EU adopted a directive on mineral waste. In 2017, a progress report criticised that four EU member states had not yet fully encompassed the directive in national law. Although there have been some improvements in the meantime, the European regulation has still, however, not been completely integrated into the legislation of the countries involved.

In a public hearing at the European Parliament, Europe’s environmental credibility was shaken by Dr. Steven H. Emerman. A copper project in Spain has an 81 metre high dam, which is situated on a steel slope less than 200 metres above a village. According to the geophysics expert with degrees from Princeton and Cornell Universities, this would be illegal in Brazil, Ecuador and even in China.

The EU sensibly supports mining projects as part of its commodity strategy. Unfortunately, the share of secondary raw materials is not yet enough to meet commodity demands with “urban mining”. However, it would be advisable to spend some money on safety standards and on a clean-up of old sites to remove the legacies of previous projects or at least to ensure their safety.

ISSF statistic for stainless steel production 2022
The statistic of the International Stainless Steel Forum (ISSF) is an important and reliable reference regarding the global and regional stainless steel production, as the data is mainly derived directly from stainless steel producers who are members of the ISSF. The organisation also publishes even more interesting data, which can be viewed on the website www.worldstainless.org, but unfortunately there is no data for the use of stainless steel scrap in the works of the members. Here, there are only more or less solid estimates and models made by market researchers and figures on trade flows, but these exclude, however, the individual domestic consumption.

According to ISSF, the global stainless steel melt production in 2021 could have increased by 10.6% to 56.3 million tons. With the exception of China (+1.6% / 30.6 million tons), production in all regions of the statistic grew by double digits. China had already increased significantly in 2020. In Europe, the output could increase by a solid 13.6% to an absolute 7.2 million tons. The strongest rise in stainless steel smelting must be in Indonesia. In the region described as “Others”, which includes, quite incoherently, Brazil, Russia, South Africa and South Korea, as well as Indonesia, there was 42.0% more stainless steel molten than in the previous year, which corresponds to a tonnage of 8.3 million tons.

Guest article on the image of the scrap trade
In the following article, well worth the read, are the thoughts which Tim Schneider (17), a student intern with Oryx Stainless AG, has made about the image of the scrap industry for his generation:

Scrap trade? Scrap trade! How little I knew, how little I suspected: how much prejudice, how little knowledge. After my first personal experiences I now know better. An exciting, diverse field of work that surprisingly includes a wide spectrum of challenges, an important, and becoming increasingly more important, branch that contributes significantly to environmental and climate protection. Not everyone can learn this at first hand. The majority of people only view the (stainless steel) scrap trade from the outside. Therefore, I would like to make my report and share my views.

The various clichés about the scrap trade are widely known. Yet the general public is only aware of a very small part of this complex and technically demanding recycling industry. In day to day life, most people only know the “Scrap Dealer close by”, the “Rag and Bone Man”. This very simple and short image of a scrap dealer regrettably, however, forms the basis of people’s perception of steel and stainless steel recycling. Prejudices exist and of course have roots, but are unjustified for the professional market participant. Yet the thoughts are anchored in the minds of people. What can, therefore, be done to change this outdated picture and image of scrap dealing?

In my eyes, today in particular offers the opportunity to upgrade this somewhat second-rate reputation. Through digitalisation the media is now in a state of transition. Conventional media is waning in popularity, whereby social media is becoming more and more relevant. Many, especially young people nowadays obtain their information from these sources. Conventional media, with its tendency to report in a more negative way, is “partly responsible” for today’s image of the branch, but how is it with the “new” social media? The aforementioned opportunity can present itself here.

In social media, scrap trading is more or less unknown, or at least does not feature prominently. Therefore, there is not yet a clear defined image. Because of this, it is possible to give scrap trading a completely new and more suitable image via “social media”, so that the branch is seen in a very different light. This new representation can be achieved with little effort. Through the occasional sharing of articles, the existing algorithms link interested parties together, which makes an exact addressing to the target audience much easier. At the moment, this form of media is mainly “only” used by the younger generation, but this group will steadily get older too. Perhaps the people of this generation will be the scrap traders of tomorrow.

The advantages of an image improvement are obvious. More unsolicited applications would probably be made enabling more people to begin their working career in the scrap trade. Another plus would be a more appropriate perception by all peer groups of the company. This applies to customers just as much to politicians and society in general. But it is not so much about the business side. The circular economy lighthouse contributes enormously to protect against climate change, which is widely unknown. Proper efforts in industry communications would, above all, lead to an improved image and a better understanding of the whole industry. Companies and their employees in the recycling industry should not have to hide; they should be proud and hold their heads up high.

Of course, such a transformation cannot be achieved from one day to the next. Just the same as short-term one-off impulses will not lead to the goal. Single projects, under the leadership of advertising and/or PR companies with no real knowledge of the business, often lack the enthusiasm. So why not entrust such a task to exactly these eager young people? They would bring the necessary know-how for operating social media from their everyday lives and have enough motivation for such a campaign.

I am convinced that if the normal everyday life of a young scrap dealer could be shared on various online platforms in a type of blog, then people would have the chance to become better informed about the exciting profession of a scrap trader in a very direct and immediate way.