Investors have fled the industrial metals markets as previous trading strategies have been overwhelmed by macro uncertainty.
That’s the clear take-away from an analysis of last year’s trading volumes on the world’s three major exchanges.
On the London Metal Exchange (LME), volume growth turned negative from July onwards, translating into only minimal trading growth over the year as a whole.
The CME’s high-flying copper contract held out longer before seeing both volumes and open interest slide precipitously over the fourth quarter.
As for the Shanghai Futures Exchange (ShFE), 2018 wasn’t a good year for trading volumes, with only nickel and tin experiencing any significant growth at all.
For the LME, still the world’s foremost industrial metals trading hub, 2018 was a year of two halves.
At the end of June volumes were up by more than 10 percent, helped by a surge in aluminium activity in April after the imposition of U.S. sanctions on Russia’s Rusal .
However, average daily volumes turned negative in August and stayed negative through to the end of the year, pulling back that growth rate to only 1 percent over the full year.
These calculations, by the way, exclude the new UNA trades that were introduced at the start of last year.
The UNA trade facility was offered, initially free of charge, to allow LME traders to comply with European MiFID II regulations. A requirement that all customer orders are booked within a stipulated time period poses problems for favourite LME trades such as “give-ups” to other brokers or orders to be executed at the close of the day.
UNA trades are an efficient workaround but serve to inflate LME volume figures by creating up to three reportable trades instead of one.
From February, when the LME first started publishing separate figures for UNA trades, they accounted for almost 23.5 million lots of activity through December.
At a headline level, LME volumes mushroomed by more than 17 percent last year. Strip out the UNA trades, however, and the rate of growth was only 1.2 percent – and that includes one month, January, of UNA volumes, meaning like-for-like growth was even more marginal.
The LME has at least stabilised activity after two years of outright contraction in 2015 and 2016. A reduction in trading fees for some types of spread activity has borne fruit, with volumes on short-dated spreads up 4 percent and those on medium-dated spreads up 23 percent for Jan-Oct 2018.
That was evidently not enough to offset the broader downturn in activity over the second half of the year.
Among the LME’s major contracts, only aluminium and lead registered significant growth last year.
The worst performer was the exchange’s North American aluminium alloy (NASAAC) contract, with volumes slumping by 29 percent. It was the fourth consecutive year of decline, mirroring a similar long-term contraction in the exchange’s “rest of the world” alloy contract.
INVESTORS EXIT COMEX COPPER; LOW INTEREST IN SHANGHAI
The investor exodus from the industrial metals space was especially stark on the CME’s COMEX copper contract, which enjoyed stellar growth over 2016 and 2017.
Volumes turned sharply negative over the fourth quarter of 2018 and copper futures activity in December was down 40 percent year on year, with open interest down 21 percent.
The trading metrics tally with the drop in fund activity showing up in the Commitments of Traders Reports towards the end of the year.
It is clear that Chinese investors were largely disinterested in industrial metals last year.
The ShFE, like other Chinese commodity exchanges, has in the past experienced surges of activity as the country’s legion of retail investors rotated into the “next hot thing”.
Not so in 2018, however, with volumes on most Shanghai contracts, including punters’ favourites such as steel rebar, down on 2017 levels.
Only nickel and tin bucked the broader trend, registering volume growth of 55 percent and 32 percent respectively.
The International Tin Association has linked rising ShFE tin stocks to the exchange’s warrant trading platform and the way it facilitates stocks financing.
It’s quite possible that both tin and nickel, another high-value metallic finance tool, are being buoyed by stocks financiers rather than directional investors.
NEW CONTRACTS
All three global metal exchanges continue to launch new products in an attempt to strengthen their relative positions in an undeclared battle for market share.
Three relatively new contracts are particularly noteworthy.
The LME’s steel scrap contract was the stand-out success in last year’s generally subdued trading environment. Volumes were up 42 percent year on year and open interest at the end of November was 13,013 lots compared with 4,757 in November 2017.
The LME’s steel rebar contract hasn’t fared as well, with activity shrinking by 17 percent last year, but the LME has high hopes that steel scrap will provide a springboard for its three planned hot-rolled-coil contracts.
The CME has tried to extend its copper franchise into other base metal markets but with limited success.
A possible exception might be its zinc contract, which registered volumes of 14,057 contracts last year, compared with only 141 in 2017.
The jump in trading activity is tempered by a lack of any accompanying increase in open interest, but relative to other recent CME products, such as lead (untraded) or alumina (down by 14 percent in its second full year of trading), zinc may be one to watch.
Shanghai’s success story is its copper options contract, which was launched in October after years of preparation and regulatory prevarication.
Volumes totalled 129,970 lots in the first four months of trading, with open interest ending December at close to 56,000 lots.
That’s a much higher open-interest ratio than normal for the Shanghai copper futures contract, in which significant activity takes place on an intraday basis without leaving any trace on overnight positioning.
The options product has been tailored to discourage retail speculators and has been widely seen as a longer-term challenge to the LME’s industrial user franchise.
London still leads the exchange pack when it comes to setting industry reference prices, but both CME and ShFE have ambitions to mount a genuine challenge.
None of the exchanges likes talking too much about speculative influence on their volumes, but all three will be hoping the metals punter returns sooner rather than later.
