After some fleeting optimism on the back of an apparent easing in US-China trade tensions in September, the recent run of weak US survey data saw demand concerns return to the fore. We think that global economic growth will slow further over the coming months and this, coupled with ailing investor sentiment, will continue to keep a lid on industrial metals prices this year. In contrast, subdued risk appetite should ensure that the prices of precious metals remain elevated.
- After some fleeting optimism on the back of an apparent easing in US-China trade tensions in September, the recent run of weak US survey data saw demand concerns return to the fore. We think that global economic growth will slow further over the coming months and this, coupled with ailing investor sentiment, will continue to keep a lid on industrial metals prices this year. In contrast, subdued risk appetite should ensure that the prices of precious metals remain elevated.
- Copper & Aluminium – The prices of copper and aluminium drifted lower in September. Ailing investor sentiment should keep a lid on copper prices this year, despite copper’s strong fundamentals. Meanwhile, we think that aluminium’s fundamentals are consistent with a further fall in prices by end-2019.
- Lead, Zinc & Tin – Supply issues drove lead and zinc prices higher in September, despite soft physical demand for both metals. We expect these gains to unwind before end-year as capacity is restarted and output picks up. In contrast, tin slid lower, and the headwinds to demand are likely to intensify.
- Nickel, Iron Ore & Steel – The price of nickel fell in September, but remains elevated amid fears of a supply shortage stemming from Indonesia’s 2020 export ban. Meanwhile, despite the China survey data pointing to weakness in the key construction sector, both iron ore and Chinese steel prices rose. As a further slowdown in construction activity takes its toll, we expect both prices to fall by end-year.
- Gold & Silver – The apparent easing in China-US trade tensions and a recovery in US interest rate expectations pushed down the prices of gold and silver in September. We expect the prices of both metals to fall further next year, as investors continue to scale back their expectations for US interest rate cuts.
- Platinum & Palladium – Palladium prices surged last month, on the back of bullish investor sentiment and concerns about possible supply disruptions. But provided these are avoided, we expect the palladium price rally to fizzle out. Meanwhile, ample supply should continue to weigh on the platinum price.
- Forecast Summary
Chart 1: Price Performance (% Change, 30th August 2019 – 3rd October 2019)
Sources: Refinitiv, Bloomberg, Capital Economics
- The price of copper drifted lower in September. Some seemingly positive soundings on US-China trade were unable to offset broader global growth fears, which fuelled a slightly stronger US dollar (2) and a further deepening in investors’ net-short position in the copper futures market (3).
- Ailing investor sentiment is likely to prevent any upward pressure on prices in 2019 despite copper’s strong fundamentals. Indeed, in annual terms, copper mine supply will almost certainly contract this year (4). And copper demand growth, though subdued, is still outpacing supply (5).
- In contrast, aluminium’s fundamentals seem to justify a further drop in prices by end-2019 (6). What’s more, the alumina price, which has risen relative to aluminium (7), is likely to fall, in tandem with the ongoing restart of capacity at Brazil’s Alunorte refinery, and further undermine the price of aluminium.
Chart 2: LME Copper Price & Trade Weighted US Dollar
Chart 3: Copper Non-Commercial Futures Positions
Chart 4: Copper Mine Supply Growth (% y/y)
Chart 5: CE Copper Net-Demand Proxy & Price
Chart 6: CE Aluminium Net-Demand Proxy & Price
Chart 7: Aluminium/Alumina Price Ratio
Sources: Refinitiv, Bloomberg, ICSG, WBMS, Capital Economics
- The price of lead rose in September, despite the ongoing malaise in Chinese (and global) auto production (8). The price rise was due to an environmental shutdown of smelters in China, against a backdrop of low exchange stocks (9). But assuming this Chinese capacity is restarted, lead prices should fall by end-2019.
- Zinc prices also rallied, as an expected surge in output outside of China failed to materialise. That said, our output-adjusted zinc demand proxy suggests the rally will be short-lived (10). We forecast a drop in zinc prices by end-year as an eventual pick-up in supply begins to push the market into a surplus (11).
- In contrast, the price of tin edged lower, in spite of production cuts announced by Chinese smelters and Indonesia’s PT Timah. Weak demand from the global electronics sector is weighing heavily on the price of tin (12). And upcoming US tariffs on tin-intensive Chinese imports pose an additional headwind (13).
Chart 8: LME Lead Price & China Motor Vehicle Manufacturing
Chart 9: LME Lead Price & Exchange Stocks
Chart 10: CE Zinc Net-Demand Proxy & Price
Chart 11: Global Zinc Market Balance (Th. Tonnes)
Chart 12: Global Electronics Equipment PMI & Tin Price
Chart 13: Imports from China Subject to ‘List 4’ US Tariffs (2018 Values)
Sources: Refinitiv, Bloomberg, Markit, WBMS, USTR, ILZSG, CE
- The price of nickel fell in September, but prices are still far above what nickel’s demand fundamentals appear to justify (14). Instead, fears of a supply shortage stemming from Indonesia’s ban on nickel ore exports in 2020 are keeping prices elevated and the 3m-cash price spread close to a decade-low (15).
- But even if the ban goes ahead, we think supply will hold up much better than most expect. This is in part due to an increase in Indonesia’s refinery capacity since previous export restrictions were lifted in 2017 (16), but also because we estimate that there are significant stocks of refined nickel held off-exchange (17).
- Meanwhile, iron ore and Chinese steel prices rose, despite the latest China survey data pointing to weakness in the key construction sector (18). In contrast, US steel prices plunged. Indeed, subdued demand and low prices are prompting a slowdown in US steel output growth (19).
Chart 14: CE Global Nickel Demand Proxy & Price
Chart 15: Nickel 3m-Cash Price Spread (US$ per Tonne)
Chart 16: Indonesia Nickel Production (Th. Tonnes)
Chart 17: CE Estimates of Flows of Refined Nickel to Off-Exchange Stocks (Th. Tonnes)
Chart 18: China Construction PMI & Steel Price
Chart 19: Steel Production (% y/y)
Sources: Bloomberg, Refinitiv, WBMS, WSA, Capital Economics
- The prices of both gold and silver fell on the month as an apparent easing in China-US trade tensions caused a pick-up in investor risk appetite. This pushed down the price of safe-haven assets, including the Japanese yen (20) and spurred outflows from silver ETFs (21).
- A rise in US rate expectations, which lead to a jump in US Treasury yields (22) and a fall in the stock of negative-yielding debt (23), also weighed on the prices of gold and silver. We expect prices to drop further next year as investors continue to scale back their expectations for US rate cuts.
- That said, we think that the price of silver will fall by more than the gold price, leading to a further recovery in the gold/silver price ratio (24). Indeed, unlike gold, silver prices won’t be supported by central bank buying (25), which we expect to remain strong in 2020.
Chart 20: Gold Price & Japanese Yen/US Dollar
Chart 21: Silver ETF Holdings (Mn. Ounces)
Chart 22: 10-Year US Treasury Yield & Gold Price
Chart 23: Negative-Yielding Debt & Gold Price
Chart 24: Gold/Silver Price Ratio
Chart 25: Net Central Bank Gold Purchases* (Tonnes)
Sources: Refinitiv, Bloomberg, WGC, Capital Economics
- The price of palladium rallied once again in September (26) and investors seem to anticipate further gains, reflected in the surge in net-long future positions (27). This is due to higher quantities of palladium being used in catalytic converters, which is increasing demand from the auto sector.
- But concerns about possible strikes at mines in South Africa – a major producer (28) – also played a role. That said, our transport demand proxy suggests that the palladium price rally has gone too far (29). As such, provided the strikes don’t go ahead, we expect the palladium price to decline in the coming months.
- Meanwhile, the price of platinum fell by around 5% m/m in September, as the surplus in the market continued to weigh on prices (30). We expect the price of platinum to drop further this year, as the high price of palladium, which is often mined together with platinum, ensures that supply remains ample (31).
Chart 26: Platinum & Palladium Prices (US$ per Ounce)
Chart 27: Platinum Price & Futures Market Positioning
Chart 28: Palladium Global Mine Production (2018, %)
Chart 29: Palladium Transport Demand Proxy
Chart 30: Platinum Market Balance (Th. Ounces)
Chart 31: Platinum & Producer Basket Prices
Sources: Bloomberg, Refinitiv, Johnson Matthey, Capital Economics
Table 1: Key Forecasts
Commodity Indices & Oil Price
S&P GSCI Industrial Metals Index
S&P GSCI Precious Metals Index
Brent Crude Oil (US$ per barrel)
Industrial Metals (US$ per tonne)
Chinese Steel (Rebar, RMB per tonne)
US Steel (HR Coil, Sh. ton)
Precious Metals (US$ per troy ounce)
Sources: Bloomberg, Refinitiv, Capital Economics *Iron Ore & Chinese Steel as of 2nd Oct.