Battery Metals

As copper surged to record highs last month, several senior Chinese traders started trying to contact western hedge fund managers whose names they’d only read in the press. For years, the veteran traders’ privileged insight into their own economy had given them an edge in the copper market, where China accounts for more than half of global demand.

But now they were bewildered. Everything in China pointed to a market that should be slumping, and yet prices were soaring on a wave of speculative money. What were they missing?

The approaches – direct and through intermediaries, to fund managers like Pierre Andurand and Luke Sadrian who had made a splash as some of the market’s biggest bulls – highlight the tug of war that has gripped the copper market in the past few months.

On one side are bullish fund managers in London and New York, who have plowed tens of billions of dollars into copper with an eye to future shortages. On the other are Chinese purchasers, more focused on the here and now, who have rarely if ever been so gloomy.

For the Chinese traders, it has been a humbling experience. The downbeat mood at home had persuaded them to bet against international copper prices. Then a wave of investor buying pushed prices to a record, and traders who fancied themselves the smartest players in the market were wiped out.

“This year has been tough for Chinese traders,” Tiger Shi, managing director at broker Bands Financial Ltd., said in an interview last week. “Their vaunted information advantage over the Chinese physical market didn’t bring them the rewards they imagined.”

But now, as the dust settles on last month’s frenzy, the importance of the Chinese market has reasserted itself. Prices have dropped about 13% from the peak above $11,100 a ton, as speculators sharply reduced their bullish bets in the wake of the surge — with much of that reduction driven by trend-following funds, according to traders.

Without western investors buying, all eyes are back on China, and a copper market that several industry insiders say is still the weakest they’ve ever seen it.

The tug of war between the two is likely to determine where copper prices go next: If tentative signs of a recovery in Chinese buying are sustained, some copper bulls believe the market could be gearing up for fresh record highs in the second half of the year.

But if weak Chinese orders persist, it would suggest that the soft patch is not just a result of delayed buying, but an indicator of poor underlying demand. Prices could fall even further — back to $9,000 or even $8,000 a ton, according to the most bearish traders.

It’s a dynamic that’s likely to dominate conversations as more than 1,000 smelter executives, traders, bankers and analysts are set to gather in Hong Kong this week for the London Metal Exchange’s annual Asia party. It’s traditionally an occasion for western investors to glean insight into Chinese fundamentals, but this year Chinese traders are likely to be just as interested in better understanding their counterparts.

It’s also a sign that, after more than two decades in which China’s industrialization and urbanization has been the major driver of the copper market, the situation is evolving as the electrification of everything gobbles up greater volumes of copper the world over.

Among Chinese copper traders and the fabricators who shape raw metal into pipes, wires and other parts used in everything from air conditioners to power transmission cables, the mood remains overwhelmingly gloomy.

“Business is shrinking significantly. The physical sales business is very bleak”

Even though some of the people Bloomberg spoke to in the past two weeks said they had seen a recent uptick in demand, they were reluctant to suggest that the market is turning around.

“This could be the most difficult year during my over-a-decade industry history,” said Ni Hongyan, vice general manager at trading firm Eagle Metal International Pte. “Business is shrinking significantly. The physical sales business is very bleak,” she said.

The data paints a similar picture. Copper in Shanghai’s tax-free bonded zone has been selling at a highly-unusual discount to London Metal Exchange prices for more than a month. That was painful for many Chinese merchants, who consider the second quarter the peak season for fabricators to purchase and prepare raw material stocks after the annual political meetings of the country. Instead, copper inventories on the Shanghai Futures Exchange have risen by 78% since the end of Chinese New Year to a record high for this time of the year.

A senior executive at one of the world’s top metals traders said the market for refined copper in China was weaker than he had ever seen it – “by a distance.”

Short squeeze

The disconnect between the Chinese market and western investors had been building for several months. Investors and analysts fell over one another to make the most bullish prediction for copper prices amid forecasts of soaring demand from the energy transition, and challenges boosting mine production. A series of reports estimating massive amounts of copper needed for artificial-intelligence data centers added to the frenzy.

Goldman Sachs Group Inc. said copper was in “the foothills of what will be its Everest,” predicting prices would average $15,000 a ton next year, while Andurand called for copper to hit $40,000.

The situation came to a head in May. As copper prices in China lagged international prices, many domestic traders had been placing bets that the gap would narrow, going short the international copper contracts and long the Shanghai market. After their brokers refused to put on new short positions in London to avoid being exposed to volatility during a week-long Chinese holiday, some traders placed bearish bets on the Comex in New York instead.

But as investor money kept piling in to the market, particularly US copper futures in New York, the Chinese traders were caught in a short squeeze. Faced with rising copper prices, their cash flow was running out and they had no choice but to give up, causing an unprecedented blowout in New York futures that saw them trade far above other price benchmarks.

Since then, however the Chinese market has reasserted itself.

Chinese copper exports hit a record 149,000 tons in May. LME stocks in South Korea and Taiwan — the locations closest to China — have been rising. And traders have been rushing to ship copper to the US to arbitrage the difference in prices – though none of it has yet appeared in Comex-registered inventories.

‘Not there yet’

In compiling this account, Bloomberg spoke to more than a dozen senior figures in China’s copper trading industry, most of whom who asked not to be identified discussing private information.

Many of the traders gathering in Hong Kong this week will still be nursing their wounds. The past six months could be among the worst performing period in their copper trading careers, several said.

For the wider market, the key question is what happens next.

In China, some traders say there have been tentative signs of a pick-up in buying in the past couple of weeks, a move which, if sustained, could put a floor on prices. Inventories of copper on SHFE have fallen for the past two weeks, albeit by a modest 14,000 tons. Beijing is also set to announce more long-term policy support for the economy at a key Communist Party meeting next month, which is seen boosting demand for raw materials like copper.

Wang Wei, general manager at major copper trader Shanghai Wooray Metals Group Co., which sells refined copper to hundreds of Chinese fabricators, said that demand was “rebounding a bit,” although only to return to similar levels as a year ago.

But there are still reasons to worry about China’s underlying copper consumption. Property is a key driver of copper demand, and the weakness in the Chinese sector is likely to continue as a drag, according to Eugene Chan, trading manager at Zhejiang Hailiang Co. There are also some indications that high prices are spurring a greater push for substitution of copper for aluminum.

“The financial market flood of net new length has become a trickle. Without that incremental macro-driven buyer, it comes down to whether the underlying physical market can support the current price,” said Colin Hamilton, managing director for commodities research at BMO Capital Markets. “We have to reset to a level to bring these buyers back, and we’re not there yet.”

Spot palladium prices in London hit a one-month high and briefly broke above the key level of $1,000 per troy ounce in volatile trade on Friday as some investors covered their short positions and the market was tight for nearby physical supply.

Spot palladium was up 2.6% at $947 per troy ounce by 1655 GMT after hitting $1,027, its highest since May 22. Prices had touched their lowest in four months of $867.51 on Tuesday.

The indicators of the short-term liquidity tightness were visible in thin market, known as an exchange of futures for physicals (EFP), where parties exchange a futures contract for the physical product.

“With the combination of money managers holding record short position in palladium futures, severe backwardation in the EFP market over the last days and sizable ETF allocation over the last month that results in withdrawal of the metal from the market, we are setting up for the possibility of an old fashioned short squeeze,” Jeff Klein, a trader at Heraeus, told Reuters.

The availability of palladium bars was especially tight in London, two industry sources said.

South Africa, Russia and North America are the top producers of palladium, however the Russian bars made after early 2022 are off the London market after they lost their “good delivery” status with the start of Moscow’s full-scale invasion of Ukraine.

Palladium, mainly used in the autocatalysts curbing harmful emissions, saw a 39% slump in 2023 due to bets that rising market share of palladium-free electric vehicles (EVs) would reduce demand in future.

The metals is, however, supported by this year’s brighter sales estimates for hybrid cars, which need palladium, and continuing structural deficit in the market itself.

“Given the significant deficit, above-ground stocks have declined to their lowest levels in our records (dating back to 1980) this year, with further deficits expected in 2024 and 2025” said Wilma Swarts, head of platinum group metals research at consultancy Metals Focus.

“This will further tighten liquidity and is likely to lift or support prices this year,” she added.

German automaker BMW said today that it has canceled a €2 billion ($2.15 billion) order for EV battery cells with Northvolt.

German media Handelsblatt and manager magazin reported that the Swedish lithium-ion battery maker couldn’t deliver on time on a long-term supply contract for battery cells agreed with BMW in 2020.

A BMW spokesperson said today, “Northvolt and the BMW Group have jointly decided to focus Northvolt’s activities on the goal of developing next-generation battery cells. The BMW Group continues to have a strong interest in establishing a high-performance manufacturer of circular and sustainable battery cells in Europe.”

Korea’s Samsung SDI will step in to fill the gap created at BMW by the cancellation.

manager magazine said Northvolt is having trouble ramping up industrial series production – it’s two years behind schedule and producing too much waste.

BMW ordered Northvolt’s cells for its fifth generation of batteries. They were to be manufactured in Sweden starting this year with 100% renewable energy from wind and hydropower. However, Northvolt will still supply the next-gen battery cells that BMW needs for its Vision Neue Klasse EVs.

In January, Northvolt announced it had raised $5 billion to enable the expansion of Northvolt Ett in northern Sweden and recycle batteries – the largest green loan raised in Europe to date. And in March, it broke ground on a battery gigafactory in Heide, Germany.

Yesterday, Northvolt said it was reviewing plans to build a new factory in Borlange, Sweden, but hasn’t yet decided after Swedish newspaper Dagens Industri reported that it was canceling the factory. The newspaper cited a municipal official.

Canada’s government will buy stockpiled rare earth materials from Vital Metals Ltd. in a deal that prevents the company from selling its production to a Chinese buyer.

The small Australian firm, which mines rare earths in Canada’s Northwest Territories, will sell its stockpiled rare earth material to the Saskatchewan Research Council for C$3 million ($2.2 million). The arrangement, facilitated by Canada’s federal government, keeps Vital from moving forward on a plan it started in December to sell that same stockpile to China’s Shenghe Resources Holding Co. for C$2.4 million ($1.7 million).

Canada recognizes the rare earths mine as a “strategic asset that contributes to the country’s prosperity and critical mineral goals,” Vital Metals said Monday.

The intervention is part of a wider push to block Chinese firms from delving further into Canada’s critical minerals sector. Prime Minister Justin Trudeau’s government has warned it will closely scrutinize transactions between domestic mining companies and Chinese government-linked firms and only approve deals “on an exceptional basis.” In 2022, it ordered three Chinese investors to sell their stakes in a trio of Canadian lithium firms.

In May, Canadian copper miner Solaris Resources Inc. dropped a financing deal with a Chinese firm after the arrangement was subject to a lengthy national security review from the federal government.

Vital’s stockpiled material will go toward a rare earths processing facility being built by the Saskatchewan Research Council, which has made similar purchases. The government-run council previously signed an agreement to import rare earth carbonate from Hung Thinh Group, a Vietnamese minerals producer.

Copper slipped to an eight-week low after Chinese economic data highlighted persistent weak spots in the metal’s biggest market.

Prices fell as much 1.6% to $9,587 a ton on the London Metal Exchange, after capping a fourth straight weekly drop. The world’s second-biggest economy released figures on Monday that bolstered concerns over a disappointing demand recovery. While retail sales were stronger in May, growth in industrial output and fixed-asset investment slowed, and the housing slump deepened.

President Xi Jinping’s government has rolled out various measures to steady growth and stabilize the property sector, but Monday’s data triggered calls for more powerful action. Declines in real estate investment and home prices both gathered pace in May.

“The Chinese property sector continues to weaken despite a series of easing policies,” said Wang Yingying, an analyst with Galaxy Futures Co. “People are very pessimistic about the property market.”

Copper hit a record above $11,000 just last month, but has rapidly retreated due to worries about rising global inventories and signs of weakness in China. Metals also came under pressure last week as the Federal Reserve dialed back expectations for rate hikes.