Industrial metals prices rallied in November. While we expect demand growth to stay strong in the months ahead, on the back of robust economic activity in China, we think that it will slow in 2021 as the Chinese government gradually withdraws fiscal support. Meanwhile, the gold price declined as safe-haven demand waned. That said, we still think that real yields in the US will fall a touch in the year ahead, which should provide a small lift to the gold price.
- Overview – Industrial metals prices rallied in November. While we expect demand growth to stay strong in the months ahead, on the back of robust economic activity in China, we think that it will slow in 2021 as the Chinese government gradually withdraws fiscal support. Meanwhile, the gold price declined as safe-haven demand waned. That said, we still think that real yields in the US will fall a touch in the year ahead, which should provide a small lift to the gold price.
- Base Metals – Prices surged in November. China’s rapid economic growth should mean that prices will broadly hold onto their recent gains through to the first quarter of next year. However, we think that they will ease back thereafter, in part because of the rollout of COVID-19 vaccines which should allow mine supply to pick up.
- Iron Ore & Steel – Ongoing strength in China’s construction sector gave a lift to the demand for, and prices of, both China steel and iron ore last month. Nevertheless, we expect the price of iron ore to ease back next year as production rebounds in Brazil.
- Precious Metals – The gold price sank as investors started to rotate out of safe-haven assets such as gold. But other precious metals fared better, probably because of their widespread use in industry.
- Forecast Summary
Chart 1: Price Performance (% Change, 2020)
Sources: Refinitiv, Capital Economics
- Industrial metals prices soared in November (2) as investors rotated into risky assets, such as US equities (3), due to a flurry of positive developments surrounding COVID-19 vaccines. By contrast, the value of safe-haven assets, including gold, fell, as US Treasury yields spiked (4).
- The ongoing surge in economic activity in China, reflected in strong PMI readings (5), has resulted in robust industrial metals demand, and has helped push prices higher. What’s more, higher trading volumes on the LME and ShFE (6) in November suggest that speculation may have played a role.
- Meanwhile, a renewed strengthening of the Chinese renminbi against the US dollar last month probably boosted metals imports into China. And a further broad-based decline in already-low levels of exchange stocks in China (7) suggests that demand is strong across all industrial metals.
Chart 2: S&P GSCI by Category (1st Jan. 2020 = 100) (Latest = 1st Dec.)
Chart 3: US Equities & Industrial Metals (2020)
Chart 4: US 10Y Nominal Yields & Gold Price (2020)
Chart 5: China Manufacturing PMIs & Industrial Metals Prices
Chart 6: ShFE Industrial Metals Trading Volumes
Chart 7: Total ShFE Stocks (Th. Tonnes)
Sources: Refinitiv, Markit, Capital Economics
- Industrial metals prices rallied in November (8) in part owing to a rise in investor risk appetite, reflected in the increase in combined net-long position in futures markets (9). Meanwhile, strong demand in China, as implied by the recent surge in our proprietary China Activity Proxy (CAP), also boosted prices (10).
- Ongoing strength in the construction sector in China has lifted the demand for, and price of, copper (11). However, we think that the price will ease back next year as fiscal stimulus in China is gradually withdrawn and the rollout of COVID-19 vaccines should lead to a revival in mine production.
- Elsewhere, China’s aluminium production has been growing rapidly recently whereas output ex-China has seemingly reached a trough (12). This perhaps explain why aluminium stocks on the LME have been falling, while ShFE stocks have been flat (13).
Chart 8: LME Prices (100 = 1st Jan. 2020)
Chart 9: Industrial Metals Futures Positions & Prices
Chart 10: CE CAP & Industrial Metals Prices
Chart 11: CE CAP (Construction) & LME Copper Price
Chart 12: Aluminium Production (Mn. Tonnes)
Chart 13: Aluminium Exchange Stocks
Sources: Refinitiv, Bloomberg, IAI, Capital Economics
Base Metals (continued)
- The small pickup in net-long positions in the futures market (14) as well as the ongoing recovery in auto demand has provided a lift to the price of lead (15). And while a pick-up in economic activity should provide a further boost to global car demand, we expect the price to fall soon in part due to ample supply.
- By contrast, we suspect that electronics demand growth will slow in 2021 as consumers are likely to shift their spending away from consumer goods and towards services. This change in household consumption would weigh heavily on the demand for, and prices of, most base metals, particularly tin (16).
- China’s nickel ore imports fell in October (17). Looking ahead, the recent plunge in the price of stainless steel (18) suggests that production growth will continue to fall (19), which would weigh on the demand for, and price of, nickel.
Chart 14: Lead Futures Positions & LME Lead Price
Chart 15: ‘Big 3’ Car Motor Vehicle Demand &
Chart 16: Global Electronic Equipment PMI &
Chart 17: China’s Nickel Ore Imports (Mn. Tonnes)
Chart 18: LME Nickel & ShFE Stainless Steel Price
Chart 19: China Stainless Steel Output & Nickel Price
Sources: Refinitiv, Bloomberg, CEIC, Markit, Capital Economics
- The price of iron ore surged in November as demand remained robust at a time of constrained supply. Stocks at Chinese ports dipped towards their five-year average (20). However, we expect the price to fall next year in part because a recovery in Brazilian production should swing the market into a surplus (21).
- Meanwhile, we suspect that China steel production will remain high this winter, instead of falling sharply like last year (22), as many steel mills have upgraded their facilities to comply with anti-pollution requirements. As a result, we forecast that the price of Chinese steel will ease back in 2021.
- US steel demand has recovered to pre-virus levels (23). However, we think that the US steel price will fall soon as sluggish growth in multi-family housing starts should weigh on demand in the construction sector (24) and as earlier high prices are likely to incentivise more US steel production to come back online (25).
Chart 20: Iron Ore Stocks at Chinese Ports (Mn. Tonnes)
Chart 21: Iron Ore Market Balance (Mn. Tonnes)
Chart 22: Steel Production (Mn. Tonnes)
Chart 23: US Steel Demand by Sector (% y/y)
Chart 24: US Housing Starts & Implied Construction Sector Steel Consumption Index
Chart 25: US Weekly Steel Production &
Sources: Refinitiv, WBMS, AISI, Capital Economics
- The price of gold fell in November, as investors shifted out of safe-haven assets. The change in investor sentiment was reflected in outflows from gold and silver-backed ETFs (26). And after multiple months of moving in tandem, equities and the gold price finally appeared to decouple in November (27).
- Gold prices dropped despite a fall in US real yields, which is usually positive for prices. A weaker US dollar also did little to give a lift to the price (28). In any case, we think that a small decline in already-low US real yields will boost the gold (29) and silver price a little next year.
- Elsewhere, the price of platinum rose, spurred on by higher industrial metals prices and hopes of stronger car demand in 2021. But we think that the platinum market will shift into a small surplus next year (30) as supply rebounds and investment demand slips (31), which should weigh on the price.
Chart 26: iShares Silver ETF Holdings (US$ Bn.)
Chart 27: Gold Price & S&P 500 (2020)
Chart 28: Gold Price & US Dollar Index (2020)
Chart 29: Gold Price & US 10Y TIPS Yield (2020)
Chart 30: Platinum Market Balance (Th. Ounces)
Chart 31: Change in Platinum Demand (Th. Ounces)
Sources: Johnson Matthey, WPIC, Refinitiv, Capital Economics
Table 1: Key Forecasts (End-Period)
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)
US Steel (HR Coil, Sh. ton)
Chinese Steel (Rebar, RMB per tonne)
Precious Metals (US$ per troy ounce)
Sources: Refinitiv, Capital Economics *Iron Ore, Chinese Steel, US Steel, Alumina & Commodity Indices as of 3rd Dec.
1 Standard & Poor’s Goldman Sachs Commodity Index 2 Bloomberg Commodity Index