The gloss is tarnished

Volatile economic expectations
Nickel prices on the London Metal Exchange (LME) are showing little own momentum at present, just like the base metals copper and aluminium. Prices are in a phase of correction. The entire world is looking to the central banks to estimate how high the key interest rates could indeed rise in order to fight inflation. While it had still been hoped at the start of the year that the cycle of increasing interest rates could have soon reached its peak and turning point, at least in the USA, these expectations have not yet been fulfilled in recent weeks.

American economic data on a robust economy and also a continuation of the overheated situation on the labour market give rise to fears of further and bigger interest rate increases in the US-dollar area. The rhetoric on this by the Federal Reserve chair, Powell, does the rest. In addition the war in the Ukraine goes on undiminished and the economic data from China after the Covid-19 opening is anything but clear. While a strong growth impulse had actually been expected, the political leaders in China have only officially presented the National People’s Congress with a “moderate” growth of five percent for 2023. Most recently the instability at some banks in the USA and Switzerland add another aspect to the complex.

Nickel price also currency driven
Therefore, it is hardly surprising that the US-dollar has strengthened, for rising interest rates in the USA mean that the interest gap to other economies is widening, unless the other central banks follow suit and also increase interest rates. Since the relative high of 1.10 USD/EUR at the beginning of February, the Euro has significantly weakened against the US-dollar within one month to 1.06 USD/EUR.

Also the strength of the US-dollar has been noticeable in price markdowns of commodities which are traded internationally in US-dollars. The nickel price on the LME, since the high of over USD 30,000.00/mt at the end of January, has lost quite a bit of ground and is trading at the time of writing at just below USD 23,000.00/mt. Actually, this should please numerous market participants since there had been loud criticism that the nickel price on the Exchange was no longer representative of the whole of the nickel market, more just of a small segment.

Alternative benchmarks
The fact that this was always the case and that in the past the LME nickel price was taken as the best common denominator to be the international benchmark has been deliberately overlooked. Now the events of early March 2022 have started a veritable competitive battle between the LME and potential alternative reference price providers. Encouraged anew by the announcements of the supervisory authorities to intensify the investigations into the LME, more hedge funds and investors have, in the meantime, joined in the circle of plaintiffs against the LME and its clearing house, LME Clear, in order to still retrieve the profits which had been made but then cancelled in the market disarray. As is usual in a market and competition driven economy, the weakness of the LME, along with the prospect of a (partial) share in earnings from the physical nickel and/or derivative market, generated enough creativity, motivation and financial resources in interested third parties.

In this connection the Shanghai Futures Exchange (SHFE) and the Chicago Mercantile Exchange (CME) are continually mentioned. There is already a nickel contract on the SHFE although its representativeness and liquidity, and also lack of accessibility for all market participants, makes this just as questionable as the market in London. And there are almost no details about an alternative future contract on the CME, only more ornate and somewhat diffuse announcements. What is clear is that a trading platform for physical nickel is being planned by an alliance of global mining giants under the company Global Commodities Holding (CGH) – we have already reported on this. If news reports are keenly followed, then it was noticeable that just after the announcements of the GCH further reports from different directions (including from the shareholders) increased, suggesting a necessary replacement of the time-honoured LME.

This is how successful PR and press work look like when there is one objective in mind and pockets are deep. In its turn, the LME is still not really progressing, but could at last (?) make the announcement of a return to trading during Asian business hours on the 20th March 2023. The Exchange hopes for improved liquidity but this seems questionable considering that the volume of trade in the SHFE nickel contract is also collapsing. An explanation as to why this should be so is not forthcoming. Trust and confidence can only be won with facts and also transparency, not with hope. This is valid for the LME and just as much for potential alternatives.

Central Banks make and made mistakes
But just to return to the central banks. Generally they have not exactly covered themselves with glory in their core business of fighting inflation. Reactions to the approaching inflation were far too late and so important time was lost in putting the brakes on smoothly. While the US Federal Reserve does at least acknowledge this mistake and is now fiercely tackling the problem, all to be heard from the management of the European Central Bank are mainly excuses and apologies and it sees its actions to be more driven by the Fed than they are really convinced about. So it is clear that it prefers to be involved with green finance and be in the public with this rather than with the necessary fight against the crisis.

In any case, the ECB does not understand itself to be really independent of governments anymore, but as complementary to them. And so it is treated de facto as a political body and not as an expert organisation with a clear task and mandate. This leads to a split personality situation. On the one hand interest rates are increased, on the other more money is pumped into the markets through buying bonds. Therefore braking and accelerating at the same time.

This schizophrenia is, above all, due to the political situation whereby none too few Euro countries have indebted themselves so much at low interest rates, that every strong interest rate hike could have a toxic effect and possibly even mean national bankruptcy. Since hardly anyone wants to buy bonds of such countries anymore, the ECB has to step in as buyer in order to ensure the liquidity of the countries. This is classic financing through the money printing press and, according to the economics textbook, pushing inflation.

Now it is also not that the Federal Reserve’s harshness has to be the right prescription and the cure-all to end all. The maxim is an end with horror, rather than a horror without end. If only problem solving were so simple: interest rates up and inflation is already under control or in the best case scenario would even disappear. Actually, monetary policy measures can also be taken too far, in one direction or the other. If interest rates are too high, there is the danger that the economy is pushed into a deep recession. And the current risk is not too small as companies, citizens and states face a real polycrisis (war, geopolitical tensions, decarbonisation, energy prices, protectionism, labour shortages and, and, and).

The management consultancy Accenture regularly calculates a Disruptability Index, which is supposed to express the extent of disruption (profound changes, current and expected) which individual branches face, as individual economic sectors and also as a whole. By all accounts, this index has recently risen by 200% and has, therefore, increased fourfold over previous times. Significant interest rate hikes by central banks are, of course, then very inopportune.

The result at the end will always be more or less optimal depending on country or region, but the march of time cannot be stopped. However, the performance of central bankers is also a renewed confirmation that there is hardly any professional group left which has not lost its glamour, after having been held in high esteem by the general public. Or in other words: The gloss is tarnished, and this also applies to central bankers, politicians, doctors, judges, lawyers, scientists. Perhaps, if truth be told, all people deserve respect, but in the end they are also just the same as everybody else.

Stainless steel production should grow
The information platform marketSteel, referring to the market research company MEPS International Ltd., has reported that for 2023 a raw stainless steel production of 60 million tons is expected. The same institute had predicted in June 2022 for the whole of 2022 (still?) an amount of 58.5 million tons. Whether this amount was actually realised is doubtful, since after the publication of the statistics of worldstainless (formerly ISSF) “only” an amount of 41.9 million tons were produced in the first 9 months of 2022, with a very weak 3rd quarter. Even if production in China in the 4th quarter was higher than expected, it will probably still not be enough to meet the forecast from last June. It is more likely that the actual amount is something between 54 and 56 million tons. For a comparison, worldstainless calculated a tonnage of 58.3 million tons at the time for 2021.

Unsurprisingly MEPS expects China and Indonesia will have the biggest share of growth in 2023, although a clear increase can also be seen in India. According to the market researchers the 4th quarter 2022 in Europe has developed once more stronger than the summer quarter and also for the 1st quarter 2023 further improvements are expected. Supporting this overall is that inflationary pressure should ease in the course of the year, and it would also appear that energy costs are falling again and not just in the short-term. The geopolitical tensions and the war will continue to have a negative influence and also inventory levels in western countries are decreasing at a slower rate than expected according to the analysts.

McKinsey examines the future of commodity trading
A recently published study by management consultants McKinsey about the future of commodity trading describes the outlook for the sector as excellent. Nevertheless, the sector faces some challenges, which are influenced, above all, by political and ecological issues. Russia’s invasion of the Ukraine has changed a great number of trade relationships. While in the past companies could trim their logistics and warehouses for efficiency, companies now have to consciously accept longer delivery routes and higher warehouse stocks. The high material costs and price fluctuations for raw materials in recent times have cost firms additional capital.

The team of authors, consisting of two partners from the consultancy office in Zurich along with a consultant from Calgary, observed that since the end of 2020 working capital requirements have doubled. In addition, the authors expect a similar increase if more changes are seen in trade flows. Between 2020 and 2024 energy costs are expected to increase threefold, interest costs sevenfold and companies, in absolute terms, to need additional working capital of 300 to 500 billion US-dollars. Since larger commodity traders are assumed, in general, to have better access to capital, they could use their market power and offer smaller traders or producers long-term trading contracts with appropriate financing.

Furthermore the management consultants have noticed a two and a half times higher volatility in the commodity sector. Therefore a number of companies have agreed credit lines to finance margin calls in connection with their hedging business. For companies in the energy sector the credit lines were sometimes so extensive that some European countries even had to put up guarantees for them.

In the coming years some factors should be decisive for the success of commodity traders. In the future, regional production methods, legal regulations and environmental impacts will be valued differently by customers, which all lead to a regionalisation of the commodity market. By the use of alternative energies, for example, the energy transition leads to a new cost structure, and this can vary worldwide. Therefore, the authors expect that a greater customer orientation in the commodity trade will be also necessary.

Conversely, the need for vessels with larger transport capacities will, therefore, increase as longer sea distances will be covered. Furthermore, it is expected that the end consumer will demand more sustainably produced products and are also prepared to pay extra for this. Commodity traders who understand this advantage could benefit from higher margins.

Fewer market barriers for standardised primary raw materials should allow larger commodity traders to broaden out and buy out competitors in order to achieve more attractive returns with less risk. Accordingly, a diversification in different commodities has a positive impact on risk and return in the portfolio overall. The McKinsey experts expect that smaller companies will have to probably concentrate on niche business which is less capital intense.

Several daily newspapers have reported about the extensive publication by the well-known management consultancy. Their results are also backed up with numerous statistics. The challenges described are including opportunities and risks for large and small trading houses. What is certain is that solid financing is fundamental for all trading companies. Finally the authors emphasise that the development of industry trends is also dependent on new market participants. Therefore, the so-called winners must not lose their ability to act quickly.