April 16, 2014 / 1:10 PM / 4 years ago

COLUMN-March mayhem boosts Q1 metal trading volumes: Andy Home

(Andy Home is a Reuters columnist. The opinions expressed are his own)

By Andy Home

LONDON, April 16 (Reuters) - Sharp sell-offs in copper and iron ore .IO62-CNI=SI last month helped boost first-quarter exchange trading activity across the industrial metals.

Volumes on the London Metal Exchange (LME), which dominates the base metals arena, had been looking decidedly flat over the first two months of this year. But trading in March itself hit a record 16.7 million lots, pulling first quarter volume growth up to 7.2 percent, marginally exceeding last year’s rate.

The return of volatility to the iron ore market, meanwhile, fired up trading volumes on the Singapore Exchange (SGX) and the new Dalian Commodity Exchange (DCE) contract.

Iron ore is still a frontier market with a number of exchange players jostling for a share of the post-benchmark pricing world.

Steel is even more “out there”. The Shanghai Future Exchange’s (SHFE) rebar contract towers over the ferrous trading landscape. Elsewhere, though, new contracts are still struggling to pick up traction.


Copper’s collapse out of its previous long-standing trading range last month saw volumes surge on both the LME and SHFE contracts.

******************************************************* Graphic on LME, SHFE and CME copper volumes: link.reuters.com/kav58v *******************************************************

LME copper turnover jumped to 4.3 million lots, the highest monthly total since May last year. The 23.2 million lots traded on the SHFE was the highest level of monthly activity since November 2011.

Interestingly, though, the impact on CME Group copper volumes was more muted. There was a slight bounce in March but not enough to prevent combined futures and options volumes sliding six percent in the first quarter relative to last year.

That may say a lot about the nature of the March sell-off, news of China’s first corporate default being used by local fund players as the launch-pad for a bear assault on the copper market.

The other stand-out in terms of base metals trading in the first quarter was nickel, unsurprisingly given the bull charge by the stainless steel input.

Nickel volumes on the LME surged by 45 percent over the course of the first quarter, culminating in a record monthly turnover of 1.72 million lots in March itself.

Particularly notable was the explosion in nickel options business. Cumulative Q1 volumes were almost 222,000 lots. By comparison, nickel options volume over the whole of calendar 2013 came in at 285,000 lots.


Activity across the LME contract spectrum was highly varied in the first quarter, in part reflecting the divergent price trends of the major metals.

Trading volumes in aluminium and lead, for example, were largely flat year-on-year.

A lot of the bull fizz has gone out of lead in the last month or so with investor interest switching to sister metal zinc, which saw LME trading volumes increase by nine percent in the first quarter.

Aluminium, the LME’s most liquid contract, has seen the price break upwards this month, which may translate into better volumes.

But the real story in this particular market is the promise of competition to the LME franchise from the CME.

The CME will next month launch a new physically-deliverable aluminium contract, seeking to capitalise on the fracturing of the aluminium price between LME and physical premium components.

The CME’s interim aluminium offering, a premium contract linked to the Platts Midwest U.S. assessment <0#AUP:>, saw turnover of 789 lots in the first three months of 2014, compared with 139 lots in the five months of trading last year.

That said, though, volumes dropped sharply in March relative to February and it will be interesting to see if the contract benefits from, or is eclipsed by, the new "all-in price" aluminium contract. ******************************************************* Graphic on LME Q1 volumes by contract: link.reuters.com/sav58v *******************************************************


First-quarter activity in the LME’s second-tier contracts was a mix of the good, the bad and the ugly.

NASAAC, the North American aluminium alloy contract, experienced the sharpest year-on-year rise in volumes of 51 percent, outpacing even nickel. That dramatic performance, though, was skewed by a low base in Q1 2013, when turnover shrank by 42 percent.

More durable looking are the growth trends in the LME’s cobalt and swaps contracts, up 27 and 15 percent respectively.

Molybdenum, the exchange’s other foray into the world of minor metals trading, continues to struggle, volumes falling by 28 percent in Q1 2014.

Alloy, which complements the NASAAC contract outside of North America, fared even worse, suffering a 45-percent drop and extending a trend of falling activity that has been running since the end of 2012.

The real loser, though, was the LME’s steel billet contract. The exchange has recently pointed to greater convergence between its billet price and physical market indicators after it rebased the contract back into Europe.

The market, though, appears unimpressed. Volumes collapsed to 1,145 lots in Q1 from 33,455 in the first three months of 2013.

The exchange has promised a second look at its billet contract and the possibility of new “physically- or financially-settled” steel contracts. (“Further updates on warehouse and physical network reforms”, April 7, 2014).


The LME can take some comfort from the fact that the steel trading space remains up for grabs outside of China, where the SHFE rebar contract reigns supreme.

Its success is at least partly due to the increased interest in it as a leading indicator of the iron ore price, a relationship predicated on the importance of profit margins to China’s massive steel sector.

Iron ore trading is itself evolving all the time as the world adjusts to faster-tempo pricing after the demise of the old annual “benchmark” system of pricing.

SGX, which took an early lead in the iron ore swaps space, has added options and futures to its offering.

Last month’s shake-out in the iron ore price translated into a sharp rise in activity in all three, particularly the newer futures offering. Volumes near doubled month-on-month to 45.5 million tonnes, overtaking the 34.9 million tonnes of cleared swaps.

The impact on iron ore volumes on the DCE in China itself was even more remarkable. They leapt to 15.2 million lots in March, higher than the cumulative tally of the previous five months following the October 2013 launch.

CME’s iron ore contracts also benefited, although volumes continue to lag significantly behind activity in the Asian region.


CME’s offering in the steel trading sphere is probably the most comprehensive of any exchange, running the gamut from iron ore and scrap to hot-rolled coil and billet.

While CME iron ore volumes were up in the first quarter, activity in the rest of what CME has called its “virtual mill” was very subdued in the first three months of the year.

Hot-rolled coil (HRC) volumes dropped 32 percent, while HRC options failed to trade at all.

Also untraded was the scrap contract, while billet volumes imploded to just 10 lots (and none in March itself).

There are plenty of signs, though, of appetite for some sort of risk-management mechanism in the steel market beyond iron ore.

UK clearing house LCH.Clearnet, for example, continues to report monthly activity in its North European HRC swaps offering, albeit to the relatively lowly tune of 24,440 tonnes in the first quarter.

SGX, for its part, has just launched HRC swaps and futures contacts, the former picking up some traction in the last month or so.

But there is, as yet, no sense of the sort of critical momentum currently being generated in the iron ore market.

It may not be too late for the LME to join the fray, although trying to reinvigorate the moribund billet contract seems unlikely to be the best avenue of attack. (Editing by Keiron Henderson)

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