Industrial metals: copper, aluminium, nickel and the economic cycle

What you will learn

• The main uses and supply features of copper, aluminium and nickel
• How the London Metal Exchange (LME) works: cash, three-month price and warehouse stocks
• How to read spreads and inventories as signals of tightness
• Why metal demand follows the economic cycle and where that link breaks

Explanation

Copper

Copper conducts electricity and heat well. It is used in wiring, power grids, construction, motors and electric vehicles. Supply comes from mines (ore is turned into concentrate, then smelted and refined into cathode) and from recycling. New mines take many years from discovery to production, so supply reacts slowly to prices.

Miners pay smelters treatment and refining charges (TC/RCs). Low charges mean smelters compete for scarce concentrate, a sign of tight mine supply. Copper is nicknamed "Dr Copper" because its price is said to predict the economy. This is a loose observation with many exceptions: mine disruptions, Chinese stockpiling and financial flows can move copper without any change in the economy.

Aluminium

Aluminium is light and used in transport, packaging and construction. Smelting uses electrolysis, which needs very large amounts of electricity, so the power price is one of the largest cost items. When European power prices rose sharply in 2021–2022, several European smelters cut output. An aluminium price is therefore partly an energy price.

Nickel

Nickel is mainly used in stainless steel and also in some battery cathodes. Not all nickel is the same: high-purity Class 1 nickel can be delivered against LME contracts, while lower-grade Class 2 products (ferronickel, nickel pig iron) mostly go to steel mills. Indonesia has expanded production strongly in recent years and is the largest producer.

Nickel also shows how violent metal markets can be. On 8 March 2022 the LME three-month nickel price more than doubled within hours to above $100,000 per tonne. The LME suspended trading, cancelled trades made that day and reopened on 16 March with price limits. Lesson for traders: an exchange can halt and cancel, and an illiquid market can gap far beyond any stop.

China and other exchanges

China is the largest consumer of all three metals, so Chinese construction, manufacturing and stockpiling matter. The Shanghai Futures Exchange (SHFE) and COMEX in New York also trade copper; price gaps between them reflect import costs and local supply.

How the LME works

• Prices are in US dollars per tonne. Lot sizes: copper 25 tonnes, aluminium 25 tonnes, nickel 6 tonnes.
• The LME has prompt dates (delivery dates) daily out to three months, then weekly and monthly. "Cash" is for delivery two business days ahead; the three-month contract is the most liquid.
• Metal sits in LME-approved warehouses as warrants (ownership documents). Cancelled warrants are metal booked for removal; a rising share of cancelled warrants can signal physical demand.
• LME stocks are only part of world stocks: there are also off-warrant, SHFE, COMEX, producer and consumer stocks.

Reading spreads

The cash–three-month spread compares near and later delivery. Contango and backwardation are covered in the Derivatives course. For metals, a useful test is full carry: financing plus storage and insurance for the period. Contango close to full carry suggests ample metal; contango well below full carry, or backwardation, suggests tightness.

The economic cycle

Demand moves with industrial production, construction and purchasing managers' surveys (see the Macro course). Supply responds with long delays, which creates cycles of shortage and surplus. When prices fall below the cash costs of high-cost producers, output cuts tend to follow, but often months later.

Worked example

Hypothetical example: is the copper market tight? Assumptions: cash copper $9,000 per tonne, three-month $9,060 (contango $60). Financing 4% per year, 91 days. Storage and insurance $0.40 per tonne per day.

1. Financing: $9,000 × 0.04 × 91 ÷ 365 = $89.75.
2. Storage: $0.40 × 91 = $36.40.
3. Full carry: $89.75 + $36.40 = $126.15.
4. Contango as share of full carry: $60 ÷ $126.15 = about 48%.

The market pays holders only about half the cost of storing metal, a sign of moderate tightness.

Part 2: exposure. One LME copper lot at $9,060: 25 × $9,060 = $226,500. A 5% move = $11,325, about €10,295 at EUR/USD 1.10.

Excluded: commissions, margin interest, LME rent differences between warehouses and broker-specific CFD contract sizes.

Common mistake

Practice activity

Hypothetical data.

1. Aluminium cash $2,400, three-month $2,440. Financing 5% per year for 91 days; storage $0.30 per tonne per day. Calculate full carry and the contango as a share of it.
2. One nickel lot (6 tonnes) at $16,000 per tonne gaps 8% against you overnight. Calculate the loss in dollars and in euros at 1.10.
3. LME copper stocks fall, cancelled warrants rise to 60% of stocks and the cash–three-month spread moves into backwardation. How do you interpret this?

Key takeaways

• Copper follows construction and power grids, aluminium is partly an energy price, nickel depends on steel and batteries.
• The LME trades cash and three-month prices; warrants and cancelled warrants show physical flows.
• Compare contango with full carry to judge tightness.
• Exchanges can halt trading and cancel trades, as LME nickel showed in 2022.

Next step

In the next lesson you move from mines to fields: grains, softs, weather and harvest reports.