Time for a reality check

After the broad-based rally of the last few weeks, the prices of many industrial commodities dipped a little this week, reflecting concerns about rising new virus cases and the widespread tightening of virus containment measures. The rally may well resume next week but, for the most part, we do not think that the recent price moves can be justified by the underlying fundamentals; investor buying has been a key driver of prices. This is one reason why we suspect that the prices of many agriculturals and metals will be falling in the second half of this year. Turning to next week, China is set to publish its December activity and investment data. All the signs are that the data will show persistent strength. What’s more, industrial activity may even boom in the usually quiet months of January-February, as China’s workers are being encouraged not to travel home for Chinese New Year as a virus precaution. (See our China Economics Weekly.) This would mean that metals demand and prices will be supported for much of Q1, although refined metal supply may be higher too.