Most metals prices advanced in February, with the exception of gold and silver. However, we suspect that the current prices of industrial metals look overextended, especially given the recent run of China PMIs. Accordingly, we think that downside risks to prices are mounting.
- Overview – Most metals prices advanced in February, with the exception of gold and silver. However, we suspect that the current prices of industrial metals look overextended, especially given the recent run of China PMIs. Accordingly, we think that downside risks to prices are mounting.
- Base Metals – A further increase in investor risk appetite lifted prices in February. Despite the recent rally, we are sticking to our view that the prices of base metals will end the year lower, as economic activity in China comes off the boil in H2 2021.
- Iron Ore & Steel – Despite a drop in the February China construction PMI, iron ore prices consolidated their gains in February. Nonetheless, we still expect a sharp fall in its price by end-year on the back of slowing growth in China and a revival in supply from Brazil.
- Precious Metals – A surge in US real yields pushed down the price of gold in February. While we don’t expect US real yields to rise much more, if at all, we think that reduced safe-haven demand as the global economy recovers will mean that the gold price falls a little further over the course of this year.
- Forecast Summary
Chart 1: Price Performance (% Change)
Sources: Refinitiv, Capital Economics
- Industrial metals prices made further gains last month (2), despite signs that manufacturing activity growth in China is starting to ease back (3). Promising progress on vaccines (4) prompted optimism about demand, which, in turn, boosted investor risk appetite (5).
- Meanwhile, the unexpected rise in US nominal yields, which was largely driven by an increase in real yields (6), weighed on the prices of precious metals, including gold and silver. We suspect that investment demand for precious metals will ease further this year as nominal yields remain around current levels.
- Despite the large gains made by industrial metals prices in February, we are sticking to our forecast of a pull-back in demand and prices later this year (7), premised on our view that China’s economic growth will be slowing as stimulus spending is reined in.
Chart 2: S&P GSCI by Category (1st Jul. 2020 = 100) (Latest = 3rd Mar. 2021)
Chart 3: China Manufacturing PMIs &
Chart 4: Total COVID-19 Vaccines Administered
Chart 5: Industrial Metals Futures Position & Price
Chart 6: Change in US 10Y Treasury Yields
Chart 7: CE Forecasts of GSCI Industrial Metals
Sources: Refinitiv, Bloomberg, Markit, Capital Economics
- Industrial metals prices marched higher in February, underpinned by a further increase in investor optimism. That said, the recent increase looks a little stretched, especially considering that risky asset prices, such as US equities, made only small gains (8), while the US dollar has been relatively flat (9).
- One particular beneficiary of the recent leg-up in prices has been copper, which is back to 2011 levels in excess of $9,000 per tonne. But there are signs that mine supply from top producers in Latin America is starting to pick back up in China’s import data (10), which will ultimately weigh on prices.
- Meanwhile, the price of tin surged, not long after the coup in Myanmar (11), before reversing course. But the price seems detached from its fundamentals, including electronics demand (12). We forecast that the tin market deficit will narrow sharply this year (13), which will weigh heavily on tin prices by end-2021.
Chart 8: US Equities & Industrial Metals
Chart 9: US Dollar Index (DXY) & Industrial Metals
Chart 10: Share of Latin American Suppliers in
Chart 11: LME Tin Price (US$ per Tonne, 2021)
Chart 12: Global Electronics PMI & Tin Price
Chart 13: Tin Market Balance (Th. Tonnes)
Sources: GACC, Markit, Refintiv, ITA, Capital Economics
Base Metals (continued)
- Aluminium output growth showed few signs of slowing in January (14). Exchange stocks of aluminium are higher than in recent years (15), and we also reckon that plenty of supply is being held off-exchange. Indeed, the high levels of off-warrant LME stocks chimes with our view (16).
- Turning to nickel, prices continued to edge higher in February, supported by a rising stainless steel price in China (17). That said, the recent sharp fall in the China construction PMI (18) tallies with our view that the property sector will face additional headwinds this year, ultimately weighing on nickel demand.
- Finally, the price of lead made little headway last month. This may reflect slightly weaker-than-expected auto demand and output in China (19) and the euro-zone in January. In any case, we forecast that prices will fall by end-year as supply rebounds.
Chart 14: Aluminium Production (Jan., % y/y)
Chart 15: LME Aluminium Stocks (Th. Tonnes)
Chart 16: Off-Warrant Stocks as % of LME Exchange Stocks (Dec. 2020)
Chart 17: LME Nickel Price & China Stainless Steel Price
Chart 18: China Official Non-Manufacturing PMIs
Chart 19: China Car Production & Lead Price
Sources: IAI, Markit, Refinitiv, Capital Economics
- The prices of iron ore and Chinese steel made further gains last month, despite China’s PMI data showing a downturn in construction activity (20). We think lower Chinese demand, coupled with higher Brazilian output, will cause the iron ore market deficit to shrink this year (21) and prompt a sharp fall in its price.
- Meanwhile, growth in China’s steel production has been easing back and slowed again in January (22). Reportedly officials are keen to curb steel output in a bid to lower the sector’s emissions, but we think softer demand will also weigh on output. Product stocks are already above their 2015-19 average (23).
- Elsewhere, US steel prices jumped again, in part due to still-low domestic output (24). However, prices at these levels should incentivise supply in the months ahead. Prices have been benefitting from the strength in the housing sector (~40% of US demand) (25), but we forecast that housing starts will fall this year.
Chart 20: China Construction PMI & Steel Price
Chart 21: Iron Ore Market Balance (Mn. Tonnes)
Chart 22: China Steel Production (Mn. Tonnes)
Chart 23: Product Stocks held by China Steel Mills
Chart 24: US Weekly Steel Production & Price
Chart 25: US Implied Construction Sector Steel Consumption Index & Steel Price
Sources: Refinitiv, WBMS, AISI, WSA, Capital Economics
- The price of gold continued to fall in February, and now sits close to an eight-month low. This has been primarily due to the significant rise in real yields over the last two weeks (26). Outflows from gold ETFs also continued, reflecting reduced investor demand for safe havens (27).
- While the price of silver also declined over the past month (29), this was largely a reflection of heightened price volatility at the start of February. The silver price is still above its level at the start of the year and is high relative to the price of gold, potentially as a result of the recent rally in industrial metals (29).
- Finally, platinum and palladium prices rose. In the case of platinum, this came despite a decline in investor demand (30), suggesting that industrial demand may be contributing to the recent rally. Meanwhile, the palladium price looks to have been boosted by a surge in the price of rhodium, a substitute metal (31).
Chart 26: Gold Price & US 10Y TIPS Yield
Chart 27: SPDR Gold Shares ETF Holdings & Gold Price
Chart 28: Price Changes (%)
Chart 29: S&P GSCI Industrials Metals Index & Gold/Silver Price Ratio
Chart 30: Platinum ETF Flows & Price
Chart 31: Palladium & Rhodium Prices
Sources: Refinitiv, Bloomberg, Capital Economics
Table : 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 2nd Mar.
1 Standard & Poor’s Goldman Sachs Commodity Index 2 Bloomberg Commodity Index
Caroline Bain, Chief Commodities Economist, firstname.lastname@example.org
James O’Rourke, Commodities Economist, email@example.com
Adam Hoyes, Assistant Economist, firstname.lastname@example.org