Metals and Minerals Trading

Trafigura is one of the world’s largest traders of non-ferrous concentrates and refined metals and bulk minerals. Despite challenging conditions, the Metals and Minerals division had a robust year, growing volumes and retaining profitability comparable to that of 2018.

Market environment and performance

2019 was a challenging year for the global economy and with it the industrial activity that drives metals demand. Compounding the impact on industrial production of metals was the simultaneous decline in automobile sales across China, Europe, India and the US.

In China, while manufacturing activity slowed, construction activity remained relatively robust, which provided some relief for metals demand. Infrastructure spending also showed signs of picking-up as the government provided some fiscal support to the economy.

The three main factors that shaped the non-ferrous concentrates and refined metals markets in 2018 continued to do so throughout 2019: global trade tensions, tighter Chinese environmental regulations and low supply.

Firstly, ongoing trade tensions between China and the US, coupled with the continued slowdown of the Chinese economy, created a stagnation of global trade, substantially reducing metals consumption and negatively impacting base metal prices.

Secondly, China’s sustained emphasis on improving environmental conditions continued to curb production at the country’s mines and smelters over the year. Efforts to improve water quality along China’s major rivers, particularly along the Yangtze, saw productive assets curtailed in Hunan and Hubei. Meanwhile, an increased focus on ground water and soil pollution saw special attention paid to waste disposal processes, with several enforced shut downs occurring at assets where systems were deemed inadequate or a potential risk.

Thirdly, while demand was weak, the supply side of the metals markets also failed to impress. A combination of under investment, weather-related disruptions and changing government policy meant that percentage growth in mine supply on a year-on-year basis was in the low single digits at best.

Despite these challenging conditions of low supply growth and weak demand, Trafigura maintained its position as market leader in non-ferrous concentrates and refined metals. The base metals teams continued to trade healthy volumes of both concentrates and refined metals, highlighting their ability to capture opportunities at all points of the business cycle, and by offering our business partners innovative solutions that make use of our various strengths in operations, logistics, credit and finance.

Traded volumes in concentrates remained consistent year-on-year at 10.6 million metric tonnes. In refined metal, volume increased 15 percent to 9.3 million metric tonnes from 8.1 million metric tonnes in 2018.

A key event in 2019 was the restructuring of the non-ferrous metals division into four main groups, formally integrating the concentrates and refined books for each product, as well as the creation of a metals business development team. The newly merged base metals teams (Copper, Lead & Zinc, Alumina & Aluminium and Nickel & Cobalt) will not only make better use of our internal analysis and market intelligence and help optimise trading activities across products, but will work closely with the business development unit to identify and take advantage of new market opportunities.

Copper (refined and concentrates)

The global market for refined copper weakened in 2019 as increased production, including that from new Chinese smelters, met softer demand triggered by slowing economic growth in all major markets. Negative sentiment was amplified by the continuing trade conflict between the US and China. Prices thus weakened throughout the year, hitting a two-year low of around USD5,600 per metric tonne in September. The one positive development was a structural change in the Chinese market as a result of regulatory curbs on scrap imports, which created a greater incentive than in recent years to import copper from the rest of the world, and boosted London Metal Exchange (LME) premiums.

The concentrates market, by contrast, saw strengthening demand and a tighter supply-demand balance. This resulted partly from the ramp-up in new smelter production but also from supply disruptions caused by social unrest in Peru’s copper belt. The market conditions were reflected in miners paying smelters significantly lower treatment and refining charges (TCRCs) during the year, with charges moving from just above USD90 per metric tonne/9 cents per pound in Q4 of calendar 2018, to just above USD50 per metric tonne/5 cents per pound in Q3 calendar 2019.

With the integration of the refined copper and concentrates books this year, we are now well positioned to successfully navigate the tighter concentrates market and to cope with reduced volatility in refined metal. Volumes in both were stable year-on-year, and profitability remained healthy, albeit lower than the record levels attained in 2018.

In refined copper, the outlook for 2020 depends to a significant extent on how the US-China trade conflict evolves. While this remains unresolved, it will continue to weigh on sentiment; on the other hand, a successful resolution would have a strong impact both on price and on market fundamentals and likely lead to significant destocking. In concentrates, continuing growth in smelter demand will contribute to increasing tightness. On a two-to-three-year view, we continue to predict a very strong fundamental environment in both concentrates and refined metal.

Lead and zinc (refined and concentrates)

The global markets for refined zinc and lead featured slowing demand and very low stocks. In zinc, the tightness in metal supply seen in 2018 continued into 2019, under the influence of constraints to smelting capacity in China due to increased environmental regulation, and the market saw steep backwardations until the end of the first half of 2019. Underlying zinc demand was weak, particularly in the automotive industry. Towards the end of our fiscal year, the tightness eased as slowing demand coincided with increasing smelter output in China, but we remain in a very low stock environment.

In refined lead, the market also began 2019 with a very low stock base, particularly in China. Despite a relatively balanced market forecast, sporadic periods of tightness throughout the year were expected, particularly through the higher consumption season.

As the year progressed, weak global consumption, exacerbated by Chinese vehicle sales that fell in 15 of the 16 months to September 2019, became the dominant factor, offsetting the unexpected supply disruption from the prolonged force majeure at Nyrstar’s Port Pirie operation. As a result, at year-end the market remained balanced.

In lead and zinc concentrates, the driving forces were increasing supply and constrained smelting capacity. In zinc, starting in the fourth quarter of 2018, the supply increase in zinc raw materials met a shortage in available smelting capacity globally. Available smelting capacity was further constrained by increased environmental demands on zinc smelters in China throughout the first half of 2019. This development led to a sharp build-up in available zinc concentrate supply and an increase in the spot treatment charges paid to smelters, from USD95 per dry metric tonne in September 2018 to USD285 per dry metric tonne in September 2019. Spot terms traded above annual terms since March 2019, however, the oversupply of raw material persists.

In lead concentrates, after three years of tightness, availability started to improve as a result of rising mine supply coming mainly from expanding production from those mines already in operation. This situation has driven up the treatment charges for lead concentrates from USD20 per dry metric tonne in October 2018 to USD100 per dry metric tonne in September 2019, based on delivery in China. It is likewise expected that this surplus will continue into next year.

Trafigura’s newly combined lead and zinc trading operation had a good year, taking advantage of our global network and strong customer relationships significantly increasing volumes across both metals in 2019.

Alumina and aluminium

Following a volatile year in 2018, conditions normalised in the alumina and aluminium markets this year. The return of a supply overhang and softening demand created an increasingly negative tone as the year progressed. With the restoration in June of the bulk of production capacity that had been cut at the Alunorte refinery in Brazil in 2018, alumina prices weakened and the ratio between alumina and aluminium prices returned to more normal levels of around 16 to 17 percent. The LME price for aluminium declined on indications of overall slowing global demand, primarily in the automotive and manufacturing sectors. Additional negative factors were continuing trade tensions, economic uncertainty and the increased availability of secondary aluminium. The one highlight was increased use of aluminium in packaging as a result of moves to curb the use of plastic packaging.

Our merged books enable us to take a more holistic approach to meeting our customers’ requirements in terms of long-term supply security and tailor-made financing solutions. Overall trading volumes increased again this year and we were able to further strengthen our global position as the largest global independent alumina and aluminium trader. The team’s customercentric approach added further long-term customer relationships which significantly enhanced our trading volumes.

The outlook for 2020 remains uncertain, with weakening macroeconomic indicators fuelling fears of a growing supply overhang. However, we believe we are well positioned to continue this year’s growth by further building sales that add value to our customers and by supporting our supply sources in a difficult market environment.

Our team is committed to maximising the contribution of aluminium to a sustainable society. As the first trader to join the Aluminium Stewardship Initiative, we strongly support standards for sustainability performance in the aluminium value chain.

Nickel

Once again, the global nickel market was in deficit in 2019, underlining the strong fundamentals for the metal, despite growing nickel pig-iron output from China and Indonesia in 2019. The implementation of the ban on Indonesian nickel ore exports from 2020 will offset any increase in supply that the market was anticipating.

Trafigura continued to expand its nickel trading activity across the whole nickel product range, and to grow its presence in key growth regions such as Indonesia and India, while maintaining its strong position in China, Europe and the rest of Asia.

We have seen an exponential increase on the volumes that we traded on nickel predominantly from Indonesia, India and the domestic China market, and we see it as a strategic metal given its importance as a component for electric vehicle (EV) batteries.

We expect 2020 to be a pivotal year for nickel. On the one hand, demand for nickel in EVs is not yet having a material impact on the market and supplies are expected to increase. On the other hand, the implementation of Indonesia’s ban on nickel ore exports from 2020 will offset any increase, and depleting ore and metal stocks are likely to support the price in expectation of a more robust 2021, when the effect of the strong demand fundamentals will be evident.

Cobalt

For much of the year, the cobalt market was looking for direction as it worked through the oversupply built up in recent years. Then came news that Glencore is to halt production at its Mutanda cobalt mine in the Democratic Republic of the Congo (DRC) towards the end of 2019. This, together with a decrease in artisanal supplies, triggered a much-needed market correction, further fuelled by a pick-up in cobalt demand in Q4. The fundamentals for the metal remain extremely strong.

Trafigura continued to provide support to its trading partners during a year when market conditions were challenging, helping them to maintain a robust position and to be well placed to capture the strong growth that is expected to materialise in the coming years.

In 2020, we expect demand growth to exceed incremental supply, fuelling the recovery of the market and revealing the true need for additional units at a time when the EV growth projection is becoming a reality.

Coal

After a strong 2018, global thermal coal prices collapsed in 2019, as switching from coal to gas in power generation, combined with a mild winter and less hot summer, led to a significant supply overhang. Low-cost gas supplies from the US became an attractive alternative to coal on a global basis (it was the first time power utilities outside the US had switched baseload fuel) and demand suffered in all regions, including North America, Europe and Asia. Even in India, consumption dropped on the back of weaker macroeconomic performance. The coking coal market had a similarly torrid time, with cuts in steel production in Europe and India eating into demand and the ripples from the US-China trade conflict prompting significant steel destocking.

Trafigura’s coal trading team positioned itself as much as possible on the short side of this falling market, maintaining total thermal and coking coal volume at similar levels to last year but generating lower profit. Within the total, our Indonesian thermal coal volume increased significantly, while volumes from the US and South Africa contracted.

In 2020, we expect the market to improve somewhat as producers in the US consolidate and other key producing countries such as Russia and Colombia also reduce supply into the Atlantic basin. We expect to maintain our current customer footprint, but given the long-term challenges facing coal, will not be investing in increasing our exposure.

Iron ore

In 2019, the iron ore market was heavily influenced by supply side disruptions including the tragic collapse of the tailings dam at Vale’s Brumadinho mine in Brazil in January 2019, significantly reduced Brazilian ore exports in Q2 and generally created a volatile pricing environment. In April, Brazil exported just 17.6 million tonnes – the lowest monthly total in more than 10 years. Australia was hit by a cyclone, which disrupted supply of ore from Rio Tinto, BHP and FMG. Knock-on effects included a sharp fall in Chinese stocks and a jump in spot prices from USD75 per tonne in February to USD120 per tonne in July.

Trafigura’s iron ore trading team had an exceptional year. It increased volume handled to 17.9 million tonnes, developing new outlets in Europe for supplies from our Porto Sudeste facility in Brazil, further expanding our domestic 'spot business out of Chinese ports, and continued development of flows from sources outside of Brazil – including Australia, South Africa, India, Mauritania and Mexico.

We expect the iron ore market to return to balance in 2020 as Brazilian supplies normalise, and our own enhanced iron ore footprint continues to generate good profitability.