Humbled Metal Traders Lick Wounds Amid Slump, Ponder Next Moves

Metals Markets: China, Short-Selling and Fundamentals
  • Shake-ups at top trading houses alter landscape for LME Week
  • Drop in metal premiums, slower China growth hit trading firms

Metals traders often brag that they can make money whether prices rise or fall, but few are crowing these days.

That’s because they’re being hit by slowing growth in China and worsening credit conditions. Trading houses including Noble Group Ltd. and Trafigura Pte Ltd. have seen a series of high-profile departures and scaled back on warehouse operations. A collapse in premiums for stockpiled aluminum, a vital source of income for many, also cut profits.

The impact has been severe: Glencore Plc reported earnings at its metals trading unit fell 50 percent in the first half to $444 million, before interest, taxes and other expenses. The lackluster results from trading houses are a key topic of conversation this week at the London Metal Exchange’s annual gathering, where some are calling the setback temporary due to the collapse in aluminum premiums.

“It’s very choppy water we are in at the moment," said Michael Lion, a consultant at Lion Consulting Asia Ltd. who has been in metals almost five decades. “Buyers now, who are under pressure themselves, can be very choosy about what they buy, when they buy and the means in which they buy.”

Mining Slump

The slowdown comes as the wider mining industry battles with low prices. The top mining official in Chile, the world’s biggest producer, said on Monday that copper prices will remain low through next year due to weak growth in China and ample supplies.

The LMEX Index, a measure of six metals contracts traded in London, dropped 16 percent this year. While the slump was bigger during the 2008 financial crisis, it’s lasting longer as China, the world’s biggest user, extends its economic slowdown.

Noble recently overhauled its metals business to cut back on copper and zinc and focus on aluminum and alumina. At least five traders in the U.S. and the U.K. left the company this month, according to a person familiar with the matter. At Trafigura, Simon Collins, head of metals and minerals, exited earlier this year. Mercuria Energy Group Ltd.’s Tristan Busch left as head of refined metals and concentrates less than a year after arriving.

LME Week

With so much turmoil, figuring out how long the current pain will last is probably the main theme of this year’s LME Week, when thousands of people in the industry meet to discuss supply contracts and get a feel for the market.

Ivan Glasenberg, the billionaire boss of Glencore, blamed aluminum -- for years a cash-cow for the company -- as the main culprit. Other executives say the slump in the industry will be temporary and doesn’t foreshadow years of low profits.

Not everyone is hurting. Trafigura’s metals business saw gross profit rise 31 percent to $509 million in the six months through March, despite what it described as a "difficult market environment.”

While falling aluminum premiums, the price consumers pay above the LME contract to secure metal supplies, are beneficial to buyers including beverage-can makers, they’re cutting profits for traders. The premium to obtain metal in Rotterdam, with import duty paid, has plunged 74 percent since December.

Noble Chief Executive Officer Yusuf Alireza has said the drop in premiums was the largest "in recent history, if not ever."

Eoin Dinsmore, a consultant at CRU Group in London, said that metals traders "were happy" to take excess aluminum stocks at the end of last year. "The traders were the willing buyers as premiums were rising, and that left them exposed," he said.

While aluminum created the biggest setback for traders, it wasn’t the only one. Nickel premiums were also under pressure as demand slowed from makers of stainless steel. Credit tightness, particularly in China, also hurt the industry as buyers were unable to afford as much metal as traders had initially expected.

On top, a fraud linked to metal stocks in two Chinese ports -- Qingdao and Penglai -- hit some traders and their financiers. The attractiveness of import financing has also been further undermined this year by the shrinking gap between Chinese and U.S. interest rates, according to CRU.

"For the bulk of the traders, it has been horrible," said Eric Schreiber, an independent investor and former head of commodities at Swiss wealth manager Union Bancaire Privee. "People are very worried."

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