Base Metal Commentary
By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
THE BASE METAL SUITE – WHAT IS THE MARKET FORECASTING?
With the Chinese markets closed this week due to the Lunar New Year Holiday, in our commentary today we will be looking at our price forecasts for the base metal suite this year and comparing them to the overall expectations in the market. Meanwhile, we will address what we expect to be the largest threats to our forecast.
LME 3M PRICE PERFORMANCE 2021
Source: Bloomberg
LME 3M PRICE PERFORMANCE 2022
Source: Bloomberg
The key price drivers behind the impressive performance of aluminium, nickel and tin so far this year have stemmed from growing concerns over the future supply availability for these metals (amid robust demand expectations), given that global stocks are at ultra-low levels and supply chain disruptions continue to play out. In addition, we have the added uncertainty surrounding escalating tension between Russia and Ukraine and the exponential rise in COVID-19 cases, which has led to heightened volatility in the markets over January. If we single out copper, which has so far posted a modest performance this year, one could argue that copper is reflecting the larger macro sentiment in the market, with western stimulus on track to be curtailed, in addition to a forecast slump in Chinese growth (please note the IMF forecasts Chinese GDP growth to average 4.8% this year, from 8.1% in 2021). Meanwhile, lead lagging the base metal suite is not a new concept, given its fundamental safety net, with two-thirds of supply coming from secondary sources, shielding the metal (to a degree) from supply-side shocks.
END-YEAR 2022 PRICE VERSUS END-YEAR 2021 PRICE (Market forecast Versus StoneX)
Source: Bloomberg, Reuters
StoneX Base Metal Price Outlook 2022
On a year-on-year basis, we believe overall that we are facing more bearish macro drivers in 2022, while micro factors for the metals will remain favourable, and this in turn will see base metals maintain high prices (on a historical basis) but will average for the year at a lower level than we recorded over 2021. This is particularly true when we access end-year prices from 2021 to end-year 2022, given the strain on supply chains and ultimate drawdown in global inventories that occurred at the end of last year.
We expect aluminium to come in as the best performing base metal of the suite this year, given the estimated pullback in global supply. Meanwhile, shared concerns over high energy prices in Europe additionally will help underpin zinc prices in the near-term. Lead is likely to be a key beneficiary in H2 2022, where we forecast an easing in semiconductor shortages, supporting the injured automotive industry, while in turn, as global supply chains start to moderate, tin on the other hand will see prices deflate as inventories start to rebuild and regional dislocations heal. Copper, although remaining elevated on a historical basis over the year, is likely to come under pressure given its ties to the macro environment as Dr. Copper, while we have a healthy supply outlook over the next few years. And finally, nickel, in a similar vein, will also see higher supply this year, supported by continued NPI expansions within Indonesia, pushing the market back into a surplus.
On a quarter-by-quarter basis, our view for the suite stands in line with market expectations, in that prices are likely to peak across the board in H1, then cooling into Q3 upon building stock levels, easing supply chains and moderating demand (however, we are cautious to highlight here that an easing in supply chains, particularly for semiconductor availability, would support the automotive industry for the production of new ICE vehicles during this period). Meanwhile, in the final quarter of the year, prices are forecast to be supported by seasonal restocking.
What Are the Largest Risks to Our Forecast?
• COVID-19 will remain a key downside risk for our forecasts, despite the global progress being made by vaccination efforts (please note, by end-December 54% of the global population had received two doses of vaccines, based on WHO figures). This is particularly true for those countries that practice zero-tolerance, in which both the supply and demand side of the equation can face disruptions.
• The timing over a significant easing in supply chain disruptions remains key to our forecasts. We are predicting that global trade flows will start to improve from H2; however, if supply chain bottlenecks continue longer, not only might we see demand levels not materialise (within the automotive industry, due to a lack of semiconductors), but the global dislocation of moving materials from the east to the west will be further extended. In our forecast, both lead and tin are the most vulnerable to the timing of supply chain easing, with a recovery in lead demand based on an improved outlook for the automotive industry, and a pullback in tin prices set on a global recovery in stock levels (please note tin’s small market size compared to other metals like copper make it particularly susceptible to market shocks).
• Finally, one of the largest areas of uncertainty for our forecast stems from any escalation in tensions between Russia and Ukraine. If an invasion occurs, then our forecasts will be subject to change. As it stands, regarding the possibility of U.S. and U.K. sanctions, metals have not been singled out (likely as a result of the U.S. not wanting a repeat of what happened with RUSAL back in 2014, when industry participants across Europe lobbied for a successful reversal in sanctions given the global impact to prices). However, even with sanction aside, the threat of disrupted shipments of metal exports from the Black Sea need to be considered. Below we have created a chart to highlight the global supply of metals that that arise from Russia. In our view, while aluminium and zinc hold upside risk for higher prices from further smelter closures across Europe (if energy prices, such as natural gas jump further), both copper and nickel (in particular), face significant risks, given low stocks and the fact that Norilsk Nickel is the largest global producer of nickel Class I (or high grade) nickel in the world.
RUSSIAN SUPPLY TO GLOBAL METALS MARKET
Source: Bloomberg
CURRENT FREIGHT RATES SHOW A MIXED PICTURE OF IMPROVEMENTS
Source: Bloomberg
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