Settling in for some near-term weakness - Capital Economics
Metals

Settling in for some near-term weakness

Metals Chart Book
Written by Alexander Kozul-Wright
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December was a relatively strong month for both precious and industrial metals, with prices rising almost across the board. A weaker US dollar and safe-haven buying buoyed gold prices, while base metals prices benefitted from signs that industrial activity may be turning a corner. We forecast a rise in base metal prices and a fall in gold prices by end-2020, as global growth slowly revives. However, near-term headwinds remain. As a result, we think that last year’s theme of elevated gold prices and moribund base metals will linger in the first few months of this year.

  • December was a relatively strong month for both precious and industrial metals, with prices rising almost across the board. A weaker US dollar and safe-haven buying buoyed gold prices, while base metals prices benefitted from signs that industrial activity may be turning a corner. We forecast a rise in base metal prices and a fall in gold prices by end-2020, as global growth slowly revives. However, near-term headwinds remain. As a result, we think that last year’s theme of elevated gold prices and moribund base metals will linger in the first few months of this year.
  • Copper & Aluminium – We suspect copper’s outperformance of other base metals in December partly reflects its strong fundamentals. By contrast, aluminium prices remained under pressure. But we think that aluminium prices will gain ground later this year as the outlook for demand improves.
  • Lead, Zinc & Tin – Soft demand continued to weigh on lead prices in December, while the price of tin and zinc edged up. We think zinc will underperform other base metals over the course of 2020 as increased mine supply translates into higher refined output.
  • Nickel, Iron Ore & Steel – The price of nickel benefitted from higher stainless steel production in December, while iron ore prices rose on renewed concerns over supply. We forecast a rise in the price of nickel by end-2020 as the market endures a fifth consecutive year of deficit. However, we anticipate a fall in iron ore and Chinese steel prices as iron ore supply recovers and China’s construction demand softens.
  • Gold & Silver – Gold and silver prices rose last month owing to a weaker dollar and a rise in tensions between the US and Iran. However, the prices of both commodities fell back more recently as tensions appeared to simmer, and we expect further declines by end-year.
  • Platinum & Palladium – Platinum and palladium prices surged in December. Power outages forced several South African platinum companies to scale back operations, boosting investor sentiment. That said, we are downbeat on the outlook for platinum in 2020.
  • Forecast Summary

Chart 1: Price Performance (% Change, 30th November 2019 – 8th January 2020)

Sources: Refinitiv, Bloomberg, Capital Economics


Copper & Aluminium

  • The price of copper rose in December, while the price of aluminium edged down. We suspect the rise in copper prices reflects slightly stronger demand (2), reflected in falling exchange stocks (3). Improved investor sentiment following the announcement of an initial US-China trade deal also boosted prices.
  • However, we think that global economic growth will remain weak in Q1, which should keep a lid on prices in the near term. Thereafter, we forecast a rise in the price of copper by end-2020 as demand growth increases (4) and supply remains under pressure, leading to a third consecutive year of deficit (5).
  • Meanwhile, the aluminium cash-3m price spread returned to contango (6), perhaps due to fading fears over tighter Chinese supply. We expect China’s output to rebound in 2020, boosting its share of global production (7). Nevertheless, we forecast a rise in aluminium prices as demand improves.

Chart 2: CE Global Copper Demand Proxy & Price

Chart 3: Copper Exchange Stocks & Price

Chart 4: Copper Apparent Consumption Growth (% y/y)

Chart 5: Refined Copper Market Balance (Th. Tonnes)

Chart 6: LME Aluminium Cash-3M Price Spread
(US$ per Tonne)

Chart 7: Share of Global Aluminium Production (%)

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


Lead, Zinc & Tin

  • The price of lead fell in December. We suspect this reflects soft demand (8), as strength in China’s auto sector was offset by persistent weakness in the US and euro-zone. However, lead inventories look low by historic standards (9) and we think they will come under further pressure this year as demand recovers.
  • The price of zinc edged up, though this didn’t fully reverse its sharp fall in November or close the gap with the wider industrial metals index (10). The dip in exchange stocks points to prices rising further (11) but we forecast a decline in prices as refined supply picks up strongly this year.
  • The price of tin also rose, which is consistent with a small increase in global demand as implied by our tin demand proxy (12). We forecast a rise in tin prices this year. That said, robust supply, which has helped to boost stocks recently (13), should prevent any significant gains.

Chart 8: CE Global Motor Vehicle Lead Demand Proxy & Price (% y/y)

Chart 9: Refined Lead Stocks

Chart 10: S&P GSCI Industrial Metals Index & Zinc Price
(1st Jan. 2019 = 100)

Chart 11: CE Zinc Net-Demand Proxy & Price

Chart 12: CE Global Tin Demand Proxy & Price

Chart 13: Tin Exchange Stocks (Th. Tonnes)

Sources: Refinitiv, Bloomberg, WBMS, Capital Economics


Nickel, Iron Ore & Steel

  • The price of nickel benefitted from higher Chinese stainless steel prices in December (14). Our in-house model also points to a jump in China’s nickel demand growth (15). We forecast nickel prices to rise further this year as Indonesia’s ban on ore exports leads to a shortfall in refined supply.
  • Meanwhile, renewed weakness in Brazil and Australia’s iron ore exports (16) put supply fears back on the table and boosted prices. But we think prices will soon fall back, as global iron ore production rebounds in the year ahead and the market flips into surplus by 2021 (17).
  • Turning to steel, global production fell in November, as gains in China were offset by further weakness in Japan and the EU (18). Chinese steel prices suggest China’s output could rise in the near term (19) though this will probably be offset by softer demand from the construction sector.

Chart 14: Nickel & Stainless Steel Prices (US$ per Tonne)

Chart 15: CE China Nickel Demand Proxy & Price

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

Chart 17: Iron Ore Market Fundamentals

Chart 18: Steel Production (2019, % y/y)

Chart 19: China Steel Production & Steel Rebar Price

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


Gold & Silver

  • Over the course of December, gold outperformed other safe-haven assets such as US Treasury yields (20). We suspect this can be chalked up to a decline in the trade-weighted US dollar index (21). Gold also benefited from safe-haven demand following the assassination of Iranian general Qassem Soleimani.
  • Imports of physical gold in China and India crept up in November (22). That said, gold imports are still down in year-on-year terms. Looking ahead, we suspect that local-currency gold prices will remain elevated (23) and depress consumer demand for gold.
  • Meanwhile, the price of silver surged last month due to strong investor demand, as reflected by the rise in net-long positions in the futures market (24). Interestingly, industrial metals prices also edged up, suggesting that silver responded to both safe-haven and manufacturing demand (25).

Chart 20: Gold Price & US 10-year Treasury Yield

Chart 21: Gold Price & Trade-Weighted US Dollar

Chart 22: China & India Gold Imports (Tonnes)

Chart 23: Gold Prices in Local-Currency Terms

Chart 24: Silver Non-Commercial Futures Positions & Price

Chart 25: Gold/Silver Price Ratio & Industrial Metals Prices

Sources: Refinitiv, Bloomberg, Silver Institute, Capital Economics


Platinum & Palladium

  • Strong investor demand was seemingly behind the surge in platinum prices last month, as reflected by the pick-up in net-long positions in the futures market (26). It seems that platinum’s large price discount relative to gold (27) boosted its demand as an alternative safe-haven asset.
  • That said, we forecast that the platinum market will remain in surplus this year (28), which should lower prices. The converse is true for palladium prices, which we expect to remain elevated in 2020, causing the downward drift in the platinum/palladium price ratio to continue (29).
  • Inflows into palladium ETFs trended sideways last month (30). As a result, we suspect that palladium’s rally can be explained by strong demand from the auto sector, which we think will rise again this year (31) on the back of tightening automotive emissions standards in Europe and China.

Chart 26: Platinum Price & Futures Market Positioning

Chart 27: Platinum-Gold Price Differential (US$ per Ounce)

Chart 28: Platinum Market Balance (Th. Ounces)

Chart 29: Platinum/Palladium Price Ratio

Chart 30: Palladium ETF Holdings & Price

Chart 31: Palladium Autocatalyst Demand (Th. Ounces)

Sources: Refinitiv, Bloomberg, Johnson Matthey, Capital Economics


Forecast Summary

Table 1: Key Forecasts

End-Period

Latest*

(9th Jan.)

Q1 20

Q2 20

Q3 20

Q4 20

Q1 21

Q2 21

Commodity Indices & Oil Price

S&P GSCI1

431

435

450

460

485

485

490

S&P GSCI Industrial Metals Index

325

335

340

345

350

355

360

S&P GSCI Precious Metals Index

2,024

1,945

1,875

1,875

1,810

1,805

1,770

Bloomberg2

353

355

355

360

370

370

370

Brent Crude Oil (US$ per barrel)

65

65

68

70

75

75

76

Industrial Metals (US$ per tonne)

Alumina

276

270

270

260

260

270

270

Aluminium

1,771

1,825

1,850

1,875

1,900

1,925

1,950

Cobalt

31,500

35,500

37,000

38,500

40,000

40,000

41,500

Copper

6,156

6,200

6,350

6,500

6,600

6,700

6,800

Iron Ore

95

85

80

75

70

70

65

Lead

1,901

1,950

2,000

2,050

2,100

2,125

2,150

Nickel

14,124

15,000

15,500

15,500

16,000

16,250

16,500

Chinese Steel (Rebar, RMB per tonne)

3,750

3,800

3,700

3,600

3,500

3,500

3,250

US Steel (HR Coil, Sh. ton)

599

580

590

600

600

600

625

Tin

17,237

17,250

17,500

17,750

18,000

18,250

18,500

Zinc

2,418

2,300

2,250

2,200

2,100

2,150

2,200

Precious Metals (US$ per troy ounce)

Gold

1,549

1,500

1,450

1,450

1,400

1,400

1,375

Silver

17.88

18.00

17.00

17.00

16.00

15.50

15.00

Platinum

956

950

900

850

800

800

800

Palladium

2,115

1,900

1,900

1,900

1,900

1,925

1,950

Sources: Bloomberg, Refinitiv, Capital Economics *Iron Ore & Steel as of 8th Jan.


Alexander Kozul-Wright, Commodities Economist, +44 20 3927 9833, alexander.kozul-wright@capitaleconomics.com
Kieran Clancy, Assistant Commodities Economist, +44 20 3974 7422, kieran.clancy@capitaleconomics.com