Base metals markets have seen a strong upturn in prices during the post-pandemic cycle. However, unlike the previous post-GFC cycle, where strong demand was the key driver from fundamentals, the supply side developments during this cycle have played a critical role, shoring up prices and adding to inflationary pressure. Several factors have led to base metals supply growth becoming unresponsive to the high prices or even record highs.
First, heightened supply chain disruptions have led to supply being unresponsive to higher prices. There are mainly two-phase supply disruptions. The initial outbreak of COVID-19 back in 2020 caused disruptions in major mining countries, such as zinc and copper to smelters in China, and downstream fabricators. While COVID-related disruptions have become rare elsewhere, this has continued to lead to disruptions in China as it pursues its zero-tolerance (or dynamic clearance) policy to COVID-19, as well as the whack-a-mole-style lockdowns that caused fresh disruption to the country’s aluminium smelting industry in early 2022. The second phase has been the energy crisis across China and Europe, crippled smelting capacities – from aluminium to zinc – and finally the uncertainty in Europe in the wake of the Russia-Ukraine conflict.
Secondly, supply chain bottlenecks have been highlighted in prolonged periods of port congestion and elevated freight rates. The freight rates for large bulk carriers have cooled off amid the slowdown in Chinese iron ore demand after aggressive steel cuts. Nevertheless, global container freights rates along key trade routes show no sign of easing, making the flow of metals products costly and making them take much longer than usual, thus execrating regional markets imbalances. In some regions, the elevated inland transportation costs have also added to the higher premium that consumers will have to pay on top of the agreed on contractual metal prices. The lack of truck and railyard capacity in the U.S. has led to surging costs during the pandemic. And yet, tensions over inland transportation flared up after Canadian truck drivers decided to protest and block major borders over anger about vaccine mandates.
While pandemic-related supply chain bottlenecks and disruptions may eventually subside once COVID-19 is behind us, the newly emerged power supply amid the energy crisis, in conjunction with protracted geopolitical issues, raises a question over the sustainability of future supply growth in Europe of certain metals. With power prices remaining elevated in the region, industries could be more exposed to spot power prices if they fail to hedge against power costs and lock reasonable margins. In addition, other factors could unfold further and bring a paradigm shift in the base metals supply landscape.
These include a growing policy intervention that would cap the capacity growth of certain metals as governments pivot to tackle their climate-related goals. This is especially the case for China, which has the world’s largest smelting capacity for base metals. Last year, the pursuit of aggressive energy efficiency goals had led to up to 3Mt of aluminium smelting capacity being taken offline at its peak.
Furthermore, the industry faces growing resource nationalism which could have bigger implications for base metals supply growth. Such phenomena have been seen from not only the primary mined metals but also the scrap metals industry. For many years, rising populism and anti-globalization has fuelled calls for greater control of natural resources. The pandemic has battered many economies, and key mining countries are understandably seeking additional revenues to revive their economies. Raising the mining tax significantly could potentially deter future mine supply from those key regions. In the meantime, global metals scrap flows are likely to continue to evolve as the EU is turning more restrictive on scrap metals exports to non-OECD countries that do not meet certain EU environmental standards. In addition, following China’s step, Malaysia is threatening to stop imports of lower-grade recyclable materials such as certain copper and aluminium scrap. In the short term, the industry may find other temporary outlets for this metal, but in the longer term, scrap-generating countries will need to find other ways to deal with so-called “dirty” scrap.
While supply has remained inelastic due to the above factors, the aggressive stimulus packages from global central banks and policymakers have led to a strong demand recovery as the world moves towards reopening. Base metals demand growth has outstripped the supply growth that led to acute market imbalance, and this is uneven across different regions.
The demand recovery has also distinguished this cycle from the previous crisis in the 2000s. Major economies have decided to embark on “green” recoveries with many stimulus packages focusing on energy-transition-related projects, such as boosting renewable energy installations and furthering electric vehicle penetration. The strong growth in wind and solar energy installations has seen growing demand for base metals, such as copper due to its superior conductivities, and aluminium alloy frames used in fixing solar panels. Even when we look at heavy carbon-emitting coals, China has also been boosting gas pipeline construction, which is stimulating demand for stainless steel and nickel.
In the past two years, the world has rapidly adopted new energy electric vehicles (NEVs), from Europe to China, driving demand across several metals, including copper, nickel, and aluminium. When it comes to NEVs, China was fast and furious with double-digit and even triple-digit growth during 2021. NEVs sales exploded over the past two years, and there seems to be no sign of it cooling off. At the end of 2020, the industry expected a total of just 2M units of NEV sales, but it turned out to be over 3.5M units, up by 158% year on year. Globally, pure battery-electric vehicles (BEV) have led this growth. Typically, this is more copper intensive than hybrid-electric vehicles (PHEV).
The strong demand for “green” areas has helped to partly offset the slowdown from traditional sectors, such as real estate construction in China after Beijing launched a deleveraging campaign. While the overall demand growth rate may slow, it is still the largest source of incremental demand. Base metals demand for copper and nickel is growing fast, albeit from a low base. Nevertheless, the percentage against the overall demand is fast approaching the tipping point and becoming an increasingly important market driver.
