The prices of industrial metals continued to surge in December, capping off a strong 2020. However, we expect that prices will fall this year as growth in China’s demand slows on the back of the gradual withdrawal of fiscal stimulus and tighter lending restrictions on construction firms. Meanwhile, precious metals prices rose last month as the US dollar depreciated.
- Overview – The prices of industrial metals continued to surge in December, capping off a strong 2020. However, we expect that prices will fall this year as growth in China’s demand slows on the back of the gradual withdrawal of fiscal stimulus and tighter lending restrictions on construction firms. Meanwhile, precious metals prices rose last month as the US dollar depreciated.
- Base Metals – Investor speculation and the ongoing strength in demand boosted prices in December. Nevertheless, we think that they will ease back in the second half of this year in part because a successful rollout of COVID-19 vaccines should allow mine supply to pick up.
- Iron Ore & Steel – The price of iron ore skyrocketed last month, but we still expect that the price will plummet in 2021 as demand growth slows in China and production rebounds in Brazil.
- Precious Metals – The decline in US real yields continued to support the prices of precious metals, including gold. However, we doubt that prices will rise much further as demand for safe-haven assets should fall as the global economy recovers this year.
- Forecast Summary
Chart 1: Price Performance (% Change, End-Period)
Sources: Refinitiv, Capital Economics
- The precious metals price index continued to rise in December (2) on the back of renewed concerns about COVID-19 infections (3) but also because of a weaker US dollar. We think that prices will hold up this year owing to low prevailing US real yields.
- Despite a slight fall in net-long positions held by investors in futures markets (4) and signs of a slower expansion in China’s manufacturing sector (5), industrial metals prices also performed relatively well last month. A weaker US dollar (6) as well as supply constraints explains much of the rise.
- Nevertheless, we think that industrial metals prices will decline this year (7). The rollout of vaccines should allow mine supply to continue to rise. At the same time, we expect demand growth in China to slow due to the gradual withdrawal of fiscal stimulus there.
Chart 2: S&P GSCI by Category (1st Jan. 2020 = 100) (Latest = 7th Jan. 2021)
Chart 3: Daily New COVID-19 Infections
Chart 4: Industrial Metals Futures Position & Price
Chart 5: China Manufacturing PMIs &
Chart 6: US Dollar & Industrial Metals Prices
Chart 7: CE Industrial Metals Price Forecasts for
Sources: Refinitiv, Markit, CIEC, Capital Economics
- Most industrial metals prices rose in December capping off a stellar 2020 (8) supported by strong demand growth in China, reflected in the recovery in our China Activity Proxy (9). That said, total exchange stocks ticked up a touch last year (10), which suggests that most metals markets were in surplus.
- The price of copper has soared to just over $8,000 per tonne, despite signs that construction activity in China stabilised at the end of 2020 (11). While we expect the price to remain high in the first half of 2021, we think that it will fall thereafter as mine supply rebounds.
- Global aluminium production increased in November, particularly in China (12). Considering that prices were still higher in China than elsewhere in December (13) and the fact that new capacity is coming on stream, output probably rose further in China last month.
Chart 8: LME Prices (100 = 1st Jan. 2020)
Chart 9: CE CAP & Industrial Metals Prices
Chart 10: Total Exchange Stocks (End-Year, Mn. Tonnes)
Chart 11: China Construction PMI & LME Copper Price
Chart 12: Aluminium Production (% y/y)
Chart 13: ShFE/LME Aluminium Price Ratio
Sources: Refinitiv, Bloomberg, IAI, Markit, Capital Economics
Base Metals (continued)
- The persistent strength in South Korean exports (14) along with the ongoing boom in China’s industrial sector (15), both indicators of strong electronics demand, gave a further boost to the demand for and, price of, tin last month. However, slower electronics demand growth should put a lid on prices this year.
- Lead stocks on both the LME and ShFE rose in December (16). Looking ahead, the re-introduction of lockdown measures in Europe and elsewhere will depress auto demand, at least in Q1, which will have negative implications for lead consumption as well as its price (17).
- Elsewhere, the price of nickel has risen in recent weeks owing in large part to the surge in the price of Chinese stainless steel (18) but also as a result of investor speculation. Indeed, the net-long futures positions held by investors have soared (19).
Chart 14: South Korea Exports & LME Tin Price (% y/y)
Chart 15: China Industrial CAP & LME Tin Price
Chart 16: Lead Exchange Stocks (Th. Tonnes)
Chart 17: ‘Big 3’ Motor Vehicle Sales &
Chart 18: LME Nickel & ShFE Stainless Steel Prices
Chart 19: Nickel Futures Positions & LME Nickel Price
Sources: Korea Customs Service, Refinitiv, CEIC, Capital Economics
- The price of iron ore surged in December (20) owing in part to strong growth in China’s construction sector (21). Nevertheless, we think the price of iron ore will plummet this year as weaker demand growth in China should swing the market back into a surplus (22).
- Meanwhile, the price of China steel was broadly unchanged m/m, but we expect prices to fall soon as we anticipate that domestic production will remain high (23) during the winter season. After all, many mills have recently upgraded their facilities to comply with the anti-pollution regulations.
- By contrast, the price of US steel soared amid low stocks and weak domestic production (24). And while prices will probably remain high in the months ahead owing to constrained supply, we suspect that the price will drop in 2021 as slower growth in multi-family housing starts to weigh on demand (25).
Chart 20: Iron Ore Price (US$ per Tonne)
Chart 21: China Construction CAP & Iron Ore Price
Chart 22: Iron Ore Market Balance (Mn. Tonnes)
Chart 23: China Steel Production (Mn. Tonnes)
Chart 24: US Weekly Steel Production & Price
Chart 25: US Housing Starts & Implied Construction Sector Steel Consumption Index
Sources: Refinitiv, WBMS, AISI, Capital Economics
- The prices of precious metals continued to increase in December (26). The gold price rose owing in large part to a further decline in US real yields (27) but also because of the ongoing depreciation in the US dollar (28).
- In a similar vein, the price of silver surged above its 50-day and 200-day moving averages last month (29). However, we think that most of the big gains in the prices of gold and silver are behind us as investor selling of safe-haven assets will intensify if the rollout of COVID-19 vaccines is successful.
- Heightened concerns that the virus will disrupt supply in South Africa in conjunction with a slight increase in investor net-long positions in platinum supported prices (30). By contrast, the price of palladium fell a touch last month, which meant that the palladium-platinum price spread narrowed in December (31).
Chart 26: Price Changes (%)
Chart 27: Gold Price & US 10Y TIPS Yield
Chart 28: Gold Price & US Dollar Index
Chart 29: Silver Prices (US$ per Ounce)
Chart 30: Platinum Futures Positioning & Price
Chart 31: Palladium-Platinum Price Spread
Sources: Refinitiv, WGC, 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 7th Jan.
1 Standard & Poor’s Goldman Sachs Commodity Index 2 Bloomberg Commodity Index
Samuel Burman, Assistant Commodities Economist, email@example.com