What are the main global or macro factors impacting the metals markets overall?
The industrial metals markets have been dominated by four leading macro forces since Q2 2022: the US dollar, China, energy prices, and expectations for global growth, with these macro forces over the majority of last year combining to create a “perfect storm” of headwinds, resulting in the base metals suite being the worst performing commodity asset in 2022 (falling by 4% y/y).
However, as it stands now, we are facing a softening in these macro forces, led by China’s move to drop (in entirety) its zero-tolerance policy on COVID-19 on 8 January, while forecasts for a deceleration in interest rates rises is being considered this year (as taken from implied federal funds futures readings), with the US dollar unlikely to return to its 20-year high.
Furthermore, energy prices (particularly natural gas within Europe) are unlikely to return to their record high of last year, buffered by plentiful inventories, which should aid both upstream and downstream industrial players.
Combining these factors together, we have a softening in the macro-outlook (to a certain degree), and this has aided the base metals suite in the opening months of this year. However, it is important to note that based on the World Bank’s latest forecasts, global growth will be highly fragmented, with China forecast to be one of the only countries to record an acceleration in growth this year.
What are the key impacts you’ve seen so far from China’s post-pandemic reopening on the base metals markets?
The impact of China’s reopening appears to be staggered for the base metals market, with investor sentiment and optimism over a faster than expected recovery in the country (following the announcement on 8 January that international travel would resume), buoying prices ahead of the Lunar New Year Holiday.
However, as it stands, we are now witnessing this positive market sentiment come off the boil, given the slower than anticipated pickup in activity and reality of historically weak underlining economic readings. It is important to note here, that while peak cases of COVID-19 in major cities have already been reached (before pulling back), key growth sectors in the economy, such as the property market (which is less impacted by the spread of COVID-19 and more so by strict legislation), will have a longer recovery timeline, reflecting weak confidence.
In a similar vein, the pace of Chinese growth, at least on the industrial front, will also be dependent on weather-related issues, with power rationing a key headwind last year, negatively impacting both upstream and downstream players. Having said this, 2023 is set be an El Nino year which should result in higher rainfall in the country, supporting hydropower plants, while increasing domestic output for energy products like coal and a resumption in trade, with countries like Australia, could result in lower disruption overall. Therefore, we expect that as domestic demand returns over the next several months upon a reopening in addition to accommodative policy actions from both the PBoC and government, base metal prices will be supported.
If we turn to industry performance, we expect the best performing sector of demand to occur from investment into the green transition (favouring copper, nickel, and aluminium), while construction demand will be moderate as investment into infrastructure is held back in part by a weak property sector. In addition to this, the ICE sector of the automotive industry is forecast to record muted growth, with overall demand for services outpacing that of goods.
On a final note, it is important to take into consideration that the reopening of the economy and improving power supply will also result in higher level of base metal production, and in the case of copper, in the absence of physical demand at present (with rising SHFE stocks, falling import premia and a record month in January of smelter output – driven by robust RC/TCs), it will be important to weigh both sides of supply and demand.
What’s the impact of growing resource nationalism, such as the Philippines looking to follow Indonesia’s lead in its nickel export ban?
The rising implementation of resource nationalism is one of our main risks to the supply outlook across the base metals suite, not only for knee-jerk price reactions, but the longer-term impact to global trade and premia.
At the heart of the matter is Indonesia, following the implementation of the 2020 nickel ore export ban, while increased tariffs (or outright export bans) are set to be applied over the next few years for bauxite, copper concentrate, refined tin, and nickel intermediary products. While the impact of these export tariffs varies depending on each commodity. For example, the impact on copper concentrates is lower than that of refined tin, given Indonesia stands as the world’s largest exporter of refined tin, versus being the eighth largest copper concentrate exporter, it is likely to lead to regional market tightness, especially for countries that then must adapt to alternative imports.
As it stands, we forecast that the most significant risk of these moves will occur if countries move ahead with trade tariffs before suitable investment programmes (i.e., refining plants) have been established, with the Philippines a key concern, following the announcement that the country may implement a 10% export tariff on nickel ore. Please note here, the Philippines is the world’s second largest nickel exporter and currently only has two nickel processing plants in the country (versus 34 mines). In this scenario, global market tightness could ensure, rather than just regional tightness.
What’s your view on the growing global EV market, plus the overall move to renewable energy on the “battery” base metals, such as nickel and copper?
The impact of the global move towards a greener world is arguably one of the most important trends to consider when it comes to the base metals market, as not only has it provided a lifeline (in certain cases) to the longer-term demand profile for these metals, with copper a key example, as demand from green energy is set to be responsible for more than 50% consumption growth over the next decade, increasing CAGR (over 2022-2027 period) to 2% (rather than 0.1% excluding green energy).
In the case of nickel, entire market structures are being disrupted, with increasing nickel demand for class I metal having reshaped both the demand and supply side of the industry. But in addition to these changes, consumption from this end-use market has appeared to buck the trend of wider global growth patterns as demand for these technologies are driven not only by legislation, but in the race to win the technological advantage, in addition to growing consumer appetite.
Therefore, understanding the impact of green technology to both the supply and demand side of the base metal market is vital when it comes to forecasting
fundamentals.
