October’s price gains a false dawn - Capital Economics
Metals

October’s price gains a false dawn

Metals Chart Book
Written by Kieran Clancy
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A cocktail of an apparent softening of US-China trade tensions coupled with several supply outages pushed the prices of most base metals higher in October. Perhaps somewhat unusually, the price of gold also gained ground as investors remain concerned about the uncertain macroeconomic backdrop. For our part, we think that the slowdown in global economic growth has further to run, which is likely to keep the price of gold elevated and prevent the prices of base metals from rising much in the near term.

  • A cocktail of an apparent softening of US-China trade tensions coupled with several supply outages pushed the prices of most base metals higher in October. Perhaps somewhat unusually, the price of gold also gained ground as investors remain concerned about the uncertain macroeconomic backdrop. For our part, we think that the slowdown in global economic growth has further to run, which is likely to keep the price of gold elevated and prevent the prices of base metals from rising much in the near term.
  • Copper & Aluminium – The prices of copper and aluminium drifted higher in October on the back of concerns about supply. We expect the copper market to remain in a deficit next year, which should support prices. In contrast, stronger supply growth is likely to keep a lid on the price of aluminium in 2020.
  • Lead, Zinc & Tin – Lead and zinc prices also increased last month, as losses of output were compounded by a lack of available stocks on official exchanges. Meanwhile, the price of tin recovered some lost ground, but we think that a sustained rebound is still some way away.
  • Nickel, Iron Ore & Steel – The price of nickel has declined in recent weeks despite continued outflows from exchange stocks. Meanwhile, the prices of iron ore and steel slumped, and we think further falls are in store in the months ahead as Chinese construction activity runs out of steam.
  • Gold & Silver – The prices of both gold and silver rose last month, as worries about the health of the global economy supported demand for safe-haven assets. We expect the price of both metals to ease a touch next year as the ten-year US Treasury yield ticks up and consumer demand in Asia remains soft.
  • Platinum & Palladium – Platinum and palladium prices rallied in October, but we expect a correction by the end of this year as investment demand softens. That said, while the price of platinum is likely to fall further in 2020, the price of palladium should get a boost from strong demand from the auto sector and low above-ground stocks.
  • Forecast Summary

Chart 1: Price Performance (% Change, 30th September 2019 – 5th November 2019)

Sources: Refinitiv, Bloomberg, Capital Economics


Copper & Aluminium

  • Copper prices drifted higher in October as stronger-than-expected Chinese economic data (2) and an apparent easing in China-US trade tensions boosted investor sentiment. Even so, worries about global growth are keeping a lid on prices, as suggested by investors’ net-short position in the futures market (3).
  • Concerns about supply on the back of protests and strikes at mines in top producers Chile and Peru (4) also supported the price of copper in October. Regardless of whether disruptions continue, we expect the market to remain in a deficit next year (5), which should put upward pressure on prices in 2020.
  • The price of aluminium rose as exchange stocks eased back (6) and as Rio Tinto and Alcoa announced that, given current low prices, they would review their operations at major smelters. That said, we expect ramp-ups in production elsewhere to boost supply growth next year (7) and limit price gains.

Chart 2: China Manufacturing PMI & LME Copper Price

Chart 3: Copper Non-Commercial Futures Positions
& LME Price

Chart 4: Copper Mine Production (2018)

Chart 5: Copper Market Balance (Th. Tonnes)

Chart 6: Aluminium Exchange Stocks (Th. Tonnes)

Chart 7: Aluminium Refined Production (% y/y)

Sources: Refinitiv, Bloomberg, Markit, WBMS, Capital Economics


Lead, Zinc & Tin

  • The price of lead reached a year-to-date high at the end of October, following the loss of some Australian supply at a time of low exchange stocks (8) and slightly more promising signs from China’s auto sector (9). However, the price has since eased back, and we anticipate a further fall as supply recovers.
  • Zinc prices have surged in recent weeks, owing to several smelter outages outside of China. Consequently, cancelled warrants have jumped on the LME, although they have been more stable on the ShFE (10). We expect the price of zinc to fall as these supply issues subside and the market moves into a surplus (11).
  • Meanwhile, the price of tin recovered some lost ground in October. That said, it remains the worst performing base metal year-to-date, owing largely to weak demand growth (12). And with global production likely to remain elevated (13), we see little upside for the price of tin over the coming year.

Chart 8: Lead Exchange Stocks & Price

Chart 9: China Car Production & Lead Price
(3m Mov. Avg., % y/y)

Chart 10: Zinc Cancelled Warrants (% of Total Stocks)

Chart 11: Zinc Market Balance (Th. Tonnes)

Chart 12: CE Global Tin Demand Proxy & Price

Chart 13: Global Refined Tin Production (Th. Tonnes)

Sources: Refinitiv, Bloomberg, WBMS, ITA, Capital Economics


Nickel, Iron Ore & Steel

  • The price of nickel dropped in October despite outflows from exchange stocks (14). We estimate that end-use demand for nickel is dwindling (15) and think that it will soften further in tandem with weaker economic growth in China. This is one reason why we forecast a decline in the price of nickel in 2020.
  • Meanwhile, the price of iron ore plunged in October as exports from Australia, the world’s largest producer, continued to recover from disruption earlier in the year (16). We expect that the price of iron ore will fall further over the next year, as the market moves from a deficit to a small surplus (17).
  • Both US and Chinese steel prices fell over the last month. This is despite a tick-up in China’s construction PMI (18) and an apparent increase in US steel demand (19). However, we are particularly downbeat on Chinese steel prices in 2020 as we expect hitherto robust construction activity in China to unwind.

Chart 14: Nickel Exchange Stocks & Price

Chart 15: CE Global Nickel Demand Proxy & Price

Chart 16: Australia Iron Ore Exports
(3m Mov. Avg., % y/y)

Chart 17: Iron Ore Market Balance (Mn. Tonnes)

Chart 18: Chinese Steel Price & Construction PMI

Chart 19: CE US Steel Demand Proxy (% y/y)

Sources: Refinitiv, Bloomberg, Markit, WBMS, WSA, Capital Economics


Gold & Silver

  • The gold price ticked up in October despite an apparent easing in US-China trade tensions. This was perhaps because signs that global growth slowed further kept demand for gold ETFs (20) and other safe-haven assets, such as US Treasuries, high (21). That said, we don’t see more upside for gold prices in 2020.
  • For one, we think that the ten-year US Treasury yield will rise a touch, increasing the opportunity cost of holding gold. What’s more, physical demand in top consumers China and India, which has already been extremely weak this year (22), is likely to remain soft due to rising local-currency prices (23).
  • Meanwhile, the price of silver surged on the back of strong investor demand, reflected in the rise in net-long positions in the futures market (24). Even so, we expect the price of silver to underperform gold next year, as it won’t be supported by central bank buying (25), which we think will remain strong.

Chart 20: ETF Holdings & Gold Price

Chart 21: 10-Year US Treasury Yield & Gold Price

Chart 22: China & India Gold Imports (Th. Tonnes)

Chart 23: Gold Prices in Local-Currency Terms

Chart 24: Silver Non-Commercial Futures Positions
& Price

Chart 25: Net Central Bank Gold Purchases* (Tonnes)

Sources: Refinitiv, Bloomberg, GAAC, WGC, Capital Economics


Platinum & Palladium

  • Strong investor demand appears to be behind the surge in the price of platinum in October. Inflows into platinum ETFs rose and net-long positions in the futures market picked up (26). Investors may be starting to take advantage of the large price discount of platinum relative to both gold and palladium (27).
  • That said, we think that a large market surplus (28) and ample above-ground stocks will cause the price of platinum to fall back over the coming months. Meanwhile, the price of palladium reached an all-time high last month. However, our transport demand proxy suggests that the recent rally is overdone (29).
  • As such, we expect a price correction by the end of this year. Thereafter, the price of palladium should drift higher again thanks to strong demand from the auto sector (30). Upward pressure on prices will be amplified by very low level of stocks, which have been depleted by repeated market deficits (31).

Chart 26: Platinum Price & Futures Market Positioning

Chart 27: Platinum Price Differentials (US$ per Ounce)

Chart 28: Platinum Market Balance (Th. Ounces)

Chart 29: Palladium Transport Demand Proxy

& Price (3m Avg., % y/y)

Chart 30: Palladium Autocatalyst Demand (Th. Ounces)

Chart 31: Palladium Market Balance (Th. Ounces)

Sources: Bloomberg, Refinitiv, Johnson Matthey, Capital Economics


Forecast Summary

Table 1: Key Forecasts

End-Period

Q3 19

Latest*

(6th Nov.)

Q4 19

Q1 20

Q2 20

Q3 20

Q4 20

Commodity Indices & Oil Price

S&P GSCI1

405

422

405

410

420

440

460

S&P GSCI Industrial Metals Index

320

331

320

325

325

330

335

S&P GSCI Precious Metals Index

1,900

1,926

1,945

1,940

1,905

1,900

1,865

Bloomberg2

335

352

340

345

340

350

360

Brent Crude Oil (US$ per barrel)

61

62

60

60

62

66

70

Industrial Metals (US$ per tonne)

Alumina

364

369

360

350

350

340

340

Aluminium

1,702

1,817

1,700

1,725

1,750

1,775

1,800

Cobalt

35,474

35,500

34,000

35,500

37,000

38,500

40,000

Copper

5,695

5,914

5,800

6,000

6,000

6,200

6,400

Iron Ore

94

83

80

75

70

70

70

Lead

2,127

2,159

2,100

2,075

2,050

2,025

2,000

Nickel

17,219

16,300

17,000

17,000

17,000

16,000

15,000

Chinese Steel (Rebar, RMB per tonne)

3,820

3,730

3,500

3,250

3,000

2,750

2,600

US Steel (HR Coil, Sh. ton)

537

504

475

450

450

475

500

Tin

15,910

16,430

17,000

17,000

17,000

17,000

17,000

Zinc

2,429

2,548

2,400

2,350

2,300

2,250

2,200

Precious Metals (US$ per troy ounce)

Gold

1,472

1,488

1,500

1,500

1,475

1,475

1,450

Silver

17.00

17.59

18.00

18.00

17.00

17.00

16.00

Platinum

833

927

850

850

825

825

800

Palladium

1,538

1,781

1,600

1,625

1,650

1,675

1,700

Sources: Bloomberg, Refinitiv, Capital Economics *Iron Ore & Steel as of 5th Nov.


Kieran Clancy, Assistant Commodities Economist, +44 20 3974 7422, kieran.clancy@capitaleconomics.com
Franziska Palmas, Assistant Economist, +44 20 7811 3914, franziska.palmas@capitaleconomics.com