(Repeats from Friday. The opinions expressed here are those of
the author, a columnist for Reuters.)
* Copper trading volumes: https://tmsnrt.rs/2AFyV1s
* LME monthly volumes: https://tmsnrt.rs/3gKTc50
* LME volumes by contract:
By Andy Home
LONDON, July 10 (Reuters) - It's been a good couple of
months for the Shanghai Futures Exchange (ShFE).
Volumes on its base metals contracts slumped over the first
quarter of this year as China went into COVID-19 lockdown and
manufacturing activity ground to a near halt.
But trading activity has since been surging as factories
return to normal and traders cheer on Beijing's
infrastructure-heavy stimulus boost.
While China celebrates, the rest of the metals world appears
far from sure the coronavirus has been beaten.
London Metal Exchange (LME) volumes slumped over the second
quarter. So too did activity on the CME copper contract, a
bellwether of speculative activity in the industrial metals
space.
This sharp drop in trading engagement has coincided with a
robust rally in base metals prices, suggesting a lack of buy-in
to the recovery story from both industrial and fund players.
The one noticeable exception is aluminium.
Low prices, accumulating stocks and U.S. tariffs have
combined to lift trading action across all three base metals
exchanges.
CORONAVIRUS CHILL
The COVID-19 chill on trading activity has switched from
China in the first quarter of this year to the rest of the world
in the second.
Copper, a favourite metal with investors as a
metallic proxy for global economic activity, typifies the
first-half pattern.
Doctor Copper had a torrid time at the start of the year,
tumbling from a January high of $6,343 per tonne to a March low
of $4,371 as the market priced in the lockdown of much of
China's manufacturing sector.
Trading boomed on both the LME and the CME contracts, up 11%
and 17% respectively by the end of March relative to 2019.
Activity in Shanghai, by contrast, collapsed by 23% in
January and February and despite a March surge as quarantine
measures were lifted, first quarter volumes were still 4% off
last year's pace.
But Shanghai's spring-time exuberance extended through the
second quarter with copper volumes up 20% by the end of June and
open interest the highest since January.
While Chinese metals trading has bloomed, activity in London
and New York has wilted.
LME copper volumes fell by 22% in the second quarter
relative to the first, while CME volumes slumped by 29%.
The same loss of trading intensity across the two exchanges
suggests both speculative and industrial players have reduced
activity as lockdowns followed the coronavirus from east to
west.
A HALF OF TWO HALVES
This pattern of fading trading momentum has played out
across most of the LME's contracts.
Total LME volumes rose by 13% in January-March, not counting
so-called "UNA" trades. These, originally introduced as a
regulatory stop-gap, have become noticeably less popular since
May last year, when the LME started levying a fee on them.
However, as the COVID-19 chill moved from east to west,
second-quarter activity noticeably dwindled.
The LME's average daily volumes fell by 6% year-on-year in
April and by another 5% in May before collapsing 17% in June.
Year-to-date growth has braked sharply to 1.1% on an average
daily basis.
June was one of the quietest months in years.
Hedge funds seem to be playing in other markets, LME broker
Marex Spectron noting that "discretionary risk appetite remains
cautionary" and "base metals remain largely underinvested."
Meanwhile, "the trade side of the market is conspicuous by
its absence which is hardly surprising," according to Malcolm
Freedom, head of Kingdom Futures brokerage, writing at the end
of last week.
The black box algo traders continue to ply their trade but
the June slump in LME volumes suggests just about everyone else
is biding their time.
ALUMINIUM THE STAND-OUT
Aluminium was the star performer of the first half of the
year in terms of trading activity.
Volumes on the Shanghai contract rose by 28% year-on-year
after two consecutive years of decline.
LME turnover, meanwhile, rose by 12% in January-June, the
strongest growth among the LME base metal contracts and exceeded
only by the much smaller steel rebar contract.
London aluminium touched a four-year low of $1,455
per tonne in May, stimulating industrial hedging activity.
Rising volumes also reflect rising inventory.
LME aluminium stocks have surged by 68% from a mid-March low
of 967,325 tonnes to 1,625,550. There is a broad analysts
consensus that more is probably accumulating in the off-market
shadows.
All that aluminium needs to be hedged with the stocks
financiers back in business thanks to a healthy contango across
the LME aluminium curve and super-low interest rates.
Surplus metal is good for LME volumes, if not necessarily
for the price of aluminium.
Meanwhile, aluminium's fractured physical trading landscape
has boosted the CME's premium contracts.
The United States imposed a 10% tariff on imports in 2018
with exemptions granted to only a handful of countries,
including Canada, the largest supplier to the U.S market.
Now it is thinking about re-imposing tariffs on its
neighbour, sparking a rally in the premium for Midwest US
delivery.
The CME's Midwest contract saw turnover almost double in the
first half of 2020 to the equivalent of 1.65 million tonnes,
reflecting this new political uncertainty.
The CME's European contracts also experienced an explosion
in trading activity. First-half volumes on the duty-paid premium
contract were up by 175% and those on the duty-unpaid contract
by 177% relative to 2019.
Aluminium premium trading appears to have established its
home on the CME. The LME's belated catch-up products saw some
early interest after launch in March last year but its U.S.
premium contract hasn't traded since February.
TANK HALF FULL?
What's significant about this lack of metals trading
appetite is that it has coincided with a sharp rebound in metals
prices.
LME copper is currently trading at $6,310 per tonne, having
clawed back all the losses of the last five months.
But this appears to be a rally forged primarily in the
Chinese market with many players elsewhere standing aside.
As such, out-of-synch metal markets are doing no more than
reflecting an out-of-synch world. One in which Chinese economic
activity is recovering even while other countries are still
battling to control the spread of the virus.
(Editing by Jane Merriman)