Zombies have to disappear

LME measures work, nickel price sluggish
The futures market for nickel on the London Metal Exchange (LME) is still not really getting back on its feet. And this is not really due to a continued poor state of affairs following the turmoil of March 2022. On the contrary, the LME could make good progress. Market participants are returning as an expression of having more confidence again in the LME’s ability to function, and trading volumes are rising. However, the weakening global economy, especially here in Europe which includes the heavyweight Germany, and also in China, continues to cause concern. This does also have some influence on the base metal market.

The US dollar is also pushing commodity prices in one direction or the other, depending on whether economic data points hint to an interest rate cut or rather to an earlier rate cut, or just the opposite. Since the last edition, the nickel price had initially moved up in the direction of USD 16,800.00/mt, but then traded at USD 16,000.00/mt or slightly below this. However, it cannot be denied that, in addition to a rather weak steel and stainless steel economy, demand for nickel from the battery sector for electromobility is also a little sluggish.

It is not only in Germany that car sales of electric vehicles are slow, as in addition to the cancellation of governmental subsidies, interested private and business potential buyers and owners of these advanced vehicles are now actually concerned about the resale and residual value of the vehicles. Less demand for nickel for the batteries naturally also has the tendency to put more pressure on prices. However, this is partially compensated by increasing restrictions on a rather plentiful supply of primary nickel, which is diametrical to the low availability of scrap.

The first nickel producers have now announced production cuts. The BHP Group will temporarily close parts of its Kambalda factory as of June 2024 because of low nickel prices, and the Australian nickel producer Wyloo Metals Pty Ltd will close mines for the same reason. The current prices are probably still sufficient for nickel production to be economically viable in Indonesia as the variable costs are at the lowest here, also because of a low environmental sensitivity. In this context, as far as the now infamous “Big Shot” is concerned, there are already rumours in the market that this figure is once again supposed to be actively trying to put pressure on LME nickel prices by taking corresponding positions.

It is actually not really clear why a nickel producer should do something like this. Attempts at explanations for such a conduct range from a feud with other nickel producers after the squeeze of March 2020, where revenge is now sought, to an interest in forcing out market competitors through higher costs, and last but not least, to move more added value to taxation in China instead of Indonesia through lower ore prices and subsequent exports of intermediates or finished products to China. This is somewhat crude, but not completely unrealistic, as some industry experts suspect that private companies are also regularly controlled or at least supported by the state.

After all, the tycoon, according to rumours, is supposed to have financed his positions on the Exchange through Chinese banks, and not at the time through “nervous” western banks, so that the risk of a renewed fiasco appears to be very improbable, also due to the stringent price limits of the LME. On the other hand, the Chinese/Indonesian producer has been ensuring a rich supply due to an almost unstoppable increase in nickel production for the last decade, which at the same time has been keeping price development very much in check. As Reuters reported, in 2023 output grew by 23% to 1.12 million tons nickel, while on the other side, nickel prices sank on the LME by 45%, the biggest drop since 2008.

IMF expects a soft landing
The perspective for the economy as a whole, however, does show big hopes for a significant recovery, at least internationally. In its outlook published at the end of January, the International Monetary Fund (IMF) significantly raised its expectations for the USA and China, also because inflation was falling more quickly than expected. The head economist of the IMF, Pierre-Olivier Gourinshas, sees the chance for a soft landing increasing. The European Central Bank (ECB) is, however, less optimistic, perhaps also no surprise given that a lawyer is at the head. Optimism is not really a trait of the jurisprudence.

In any case, a survey of professional analysts taken by the ECB has shown that the economic growth for 2024, not very surprisingly, is expected to be weaker, and is now only anticipated to be 0.6%. At least inflation is also falling quickly in Europe. Too many problems, however, are hindering growth dynamics and expectations at the moment. In countries such as Germany the ruling politicians have been relying on the seemingly never-ending prosperity instead of setting the right course for the future. Perhaps they have not just been sitting back, but also, which is far worse, even been setting the course more in the wrong direction.

However, in a background of upcoming elections and an unmistakable feeling of unrest and dissatisfaction among people and businesses, it seems that now, hopefully, sustainable action can finally be taken to start making urgently needed corrections. This is right, because things can only get better. Hopefully!

In this context, psychologist Stephan Grünewald criticises the fact that the mood among people is mainly one of resignation and that the prevailing opinion is that nothing can be done to change the situation. According to Grünewald, instead of a willingness to tackle things socially, self-efficacy is above all experienced in the private environment. “In the past, one just had to get through crises. Today, they are like zombies that can’t be killed.” Our belief: this urgently has to change and this also requires politicians to listen, to motivate and to give a clear perspective that collective action is actually worthwhile not only for society, but also for the individual.

Traditional Reuters survey cautious
The survey regularly taken by Reuters amongst the leading commodity analysts is somewhat cautious about the parameters for the base metal nickel. Around 25 analysts were asked about the price expectations for the four quarters in 2024 and also in 2025. Reuters also wanted to know how the experts estimate the supply / demand situation for the years 2024 and 2025.

For the first quarter of the new year, the consensus is that the average LME nickel cash price will be USD 16,459.50/mt. Over the course of the year, expectations rise continually, but not excessively, to reach an average price of USD 17,237.00/mt for the final quarter. For the whole of 2024, the average is only USD 16,856.20/mt, with the highest value at USD 20,000.00/mt. The lowest price expected for 2024 is USD 15,200.00/mt. For 2025, prices are seen somewhat firmer. For this time frame, Reuters determined a value of USD 17,837.40/mt. On the whole there is also just a little fantasy here.

As far as nickel in the market place is concerned, the survey expects for 2024 that supply will exceed demand by 241,000 tonnes. In the following year, 2025, the supply surplus will decrease a little by 37,000 tonnes to 204,000 tonnes, at least in the opinion of analysts from numerous renowned banks and brokers.

LME soon with a warehouse location in Hong Kong?
In a presentation before the LME warehouse committee in December, the extension of the global warehouse network to include Hong Kong was discussed, with the hope of gaining access to the Chinese market. The registration of warehouses in China, globally the biggest consumer of industrial metals, has been a strategic goal ever since the takeover of the LME in 2012 by the Hong Kong Exchanges and Clearing (HKEX). Although the LME sees here a potential access to China, the political influence of China in Hong Kong and the resistance of local competitors have, in the past, put too high a barrier on market entry.

Because of the pressure of innovation and expansion on the Chinese Exchanges, the dynamic has changed a little. Therefore, the LME is planning new metal contracts which are orientated on the prices of the Shanghai Futures Exchange (SHFE). As far as the political influence of China in Hong Kong is concerned, the real estate giant, Evergrande, will soon show how much influence there actually is. The Chinese company was sentenced to liquidation, because of its enormous economic difficulties, by a Hong Kong court.

A further barrier could be the too high warehouse costs in Hong Kong. These are up to four times higher than the maximum rental which LME warehouses are allowed to charge. In order to be economically viable, the warehouse rents have had, therefore, to be subsidised by the Hong Kong government. Whether the plans for an LME warehouse in Hong Kong can be realised, therefore, remains to be seen in view of the numerous challenges and uncertainties.

Russian sanctions with unclear impact on the commodity market
New UK sanctions forbid British companies and individuals to trade in a range of Russian metals. For example, “UK persons” cannot demand delivery of Russian metals if these were bought after the 15th December 2023. Future international measures have also been hinted at.

There was immediate confusion about which companies and persons were affected by the rules. Although most major metal traders and banks are based outside Great Britain, many of them have British executive staff and nearly all are represented in London. The situation also challenges the LME since Russian aluminium in the meantime accounts for more than 90% of the current exchange warehouse stocks and has renewed the discussion about a ban of Russian deliveries.

In all the confusion, the most important players in the metal markets have also reacted in different ways. While JPMorgan Chase & Co. bought Russian aluminium via non-UK entities, Citigroup withdrew from the market. IXM, the third biggest metal trading house also bought Russian aluminium on the LME and demanded delivery. The British management of IXM had, however, withdrawn from trading with Russian metals. The Trafigura Group which had previously been active in the Russian market has become more cautious, and has not renewed its existing big contract with United Co RUSAL International PJSC.
The discrepancies between some of the major players on the metals markets clearly show the impact of the increasingly larger range of sanctions on the trade of Russian goods.

In the hunt for carbon dioxide
On the path to net zero emissions, there is the automatic dilemma that a reduction of carbon dioxide and greenhouse gases generated by humans will not be enough to reach the goal of keeping global warming to 1.5°C, as set out by the Paris climate conference in 2015. There is a need for additional “negative” emissions. Harmful greenhouse gases have, therefore, to be removed from the environment. Forestation and reforestation would, for example, be a natural way, but, of course, there are also technical solutions. The term “Carbon Capture and Storage”, in short, CCS, encompasses various approaches, by technological means, to collect and store carbon dioxide, so removing it from the atmosphere in the long term.

A difference is made here between “Direct Air Capture” (DAC) and the actual CCS. In the case of the former, carbon dioxide is extracted directly from the atmosphere using a filter. CCS on the other hand goes directly to the anthropogenic source for carbon dioxide caused by humans: the emissions generated by power stations and chemical or industrial plants. Once the carbon has been extracted, it has to be stored harmlessly. On the one hand, there are certain geological formations such as, for example, depleted coal, oil or natural gas deposits, which are suitable for this. Or also the world’s oceans.

According to a report by the “Global CCS Institute” think tank – originally founded by the Australian government – the North Sea is the preferred storage location for the captured carbon dioxide. Such facilities are already in operation in the European Union and CCS projects are being considered elsewhere. In order to transport the greenhouse gas there, a certain amount of infrastructure is necessary: one project is the so-called “Delta Rhine Corridor”. Operated by the German chemical giant, BASF, the Dutch Gas Company Gasunie, the transmission system operator OGE and the energy giant Shell, the vision is to lay a carbon dioxide and hydrogen pipeline from Ludwigshafen via Cologne to the North Sea.

In total, the Global CCS Institute has a good 119 different CCS projects in Europe. The matter is supported politically both by the European Union (EU) and by individual European countries: Great Britain, France, Denmark and also Norway have already published a national CCS roadmap. Germany is also working on a carbon management strategy.

The driving force is the EU’s own goal of achieving an annual carbon dioxide storage capacity of 50 million tonnes by 2030. To support this goal, the EU member states released funding of up to EUR 480 million in December 2023 to support four CO2 transport and storage projects, including a project in the port of Rotterdam. Still in the first quarter of 2024, the European Commission plans the publication of an Industrial Carbon Management Strategy.

Is CCS “the solution”? Certainly not. According to estimates of S&P Global, even an optimistic expansion of the necessary capacities by the year 2050 would only account for 4% of the “negative” emissions needed to keep in line with the 1.5°C scenario. Also the matter of costs (and long term cost degression) plays an important role here: S&P Global estimates the current monetary cost of collecting carbon dioxide from the atmosphere by DAC to be between USD 400 and 700 per tonne CO2. In the case of CCS the estimates range from USD 50 to 250 per tonne CO2.

At the recent COP28 – the abbreviation for the 28th UN World Climate Conference – this technology, which is actually interesting, has become somewhat discredited and seen by climate activists as a distraction, even as a “carte blanche for the fossil industry”. The above estimates, however, make it clear that, as happens all too often, it is only the sum of all parts which lead to the goal.