Commodities

Industrial Metals

Downward pressure on prices is mounting

Commodity prices held up well this week, despite the hawkish tone of the Federal Reserve and continued worries over a messy default by Evergrande, the Chinese property developer. Notably, European natural gas and Asian LNG prices continued to climb, powered by ongoing supply disruptions and unseasonably strong demand. Oil prices also made gains amid concerns that OPEC members are struggling to hit collective production targets which, if sustained, poses an upside risk to oil prices. Looking towards next week, Chinese PMI data are scheduled for release on Thursday/Friday. We expect a continued loss of momentum in industrial activity, which would be negative for commodity prices, especially industrial metals. Investors will also be closely watching developments around Evergrande. We expect a managed restructuring of the company, which should limit the negative impact on China’s metals demand.

24 September 2021

Evergrande collapse would put a ceiling on prices

Although a messy collapse of Evergrande is a downside risk to our near-term price forecasts, it adds weight to our view that China’s construction sector is in structural decline. In turn, this underpins our view that industrial metals prices will be on the back foot until 2025 at least.

23 September 2021

Global Steel Production (Aug.)

Despite high prices, global steel output contracted in August. And given that the authorities in China are proactively encouraging lower output there, further falls in the coming months appear likely.

23 September 2021
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Global Aluminium Production (Aug.)

August’s IAI data suggest that fears that power rationing in Chinese smelting hubs would negatively impact supply, which have boosted aluminium prices to decade highs, are overdone. Instead, we think that any fall in supply will be compensated by weaker demand, causing prices to fall by end-2021.

Making sense of the industrial metals/LatAm equities divergence

The unusual divergence between the GSCI Industrial Metals and MSCI EM Latin America Index recently reflects a couple of developments which we suspect are one-offs. We think that the typical relationship between the two asset classes will reassert itself, albeit with lower metals prices coinciding with MSCI’s index for Latin America falling short of its other regional indices.

Three key developments to keep an eye on

Most commodity prices ground higher this week. And, stepping back, we think events this week highlight three key themes to watch in the months ahead. First, natural gas prices show no sign of easing back, and are likely to remain high until early next year. Prices continued to surge this week on the back of ongoing supply disruptions and unseasonably strong demand in Asia. And, even if both these tailwinds fade, a rebuilding of stocks from their current lows should continue to support prices. Second, the growing divergence between industrial metals prices and underlying demand could set the stage for a sharp correction before the year is out. Despite the weaker-than-expected activity data out of China, industrial metals prices were a mixed bag this week. Nonetheless, they still remain close to multi-year highs. And finally, calls for OPEC+ to fully unwind its output cut before the end of next year (as is currently planned) look set to grow louder. The Biden Administration has already called for this and China has announced crude sales from its strategic reserve in an apparent bid to stem the rise in prices. The main event for commodity markets next week will be the Fed’s FOMC meeting (Tuesday/Wednesday). While we expect the Fed will fall short of formally announcing tapering QE, they may prepare the ground for it at the meeting. A repeat of the June meeting’s hawkish surprise could set the tone and drive a dollar rally, which would weigh on the prices of all commodities but particularly on some of the precious metals, which have tracked the dollar closely this year.

More of the same

Commodity markets have been relatively quiet over the last few weeks, with many prices trading in a narrow range. There are a few exceptions, most notably the prices of natural gas and coal, which have soared on the back of surging power demand and constrained supply. In contrast, oil has continued to hover around $70 per barrel, as concerns about demand prevent price gains and as OPEC+ supply restraint acts as a floor under prices. We think next week could be a bit directionless again. China is set to publish its monthly activity and spending data on Wednesday, which we expect to show further weakness. So far, commodity prices have been surprisingly sanguine about the economic downturn in China. But there are now clear signs that growth in the US and UK economies is also slowing, which underpins our view that most commodity prices will be falling as we move into 2022. CE Spotlight 2021: The Rebirth Of Inflation? We’re holding a week of online events from 27th September to accompany our special research series. Event details and registration here.

Three key points about China & asset allocation

China’s economy has lost momentum recently, and we expect it to more or less tread water over the remainder of this year, even as other major economies continue to recover. Meanwhile, the government’s regulatory crackdown on parts of the private sector seems to be broadening in scope and increasing in severity. We think that these developments have three main implications for asset allocation.

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