By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
The industrial metals markets have been dominated by four leading macro forces since Q2 2022, the U.S. dollar, China, energy prices and expectations for global growth, with these macro forces over the majority of last year combining to create a ‘perfect storm’ of headwinds, resulting in the base metal suite being the worst performing commodity asset in 2022 (falling by 4% Y/Y). However, as it stands now, we are facing a softening in these macro forces, led by China’s move to drop (in entirety) its zero tolerance policy on COVID-19 on 8th January, while forecasts for a deceleration in interest rates rises is being considered this year (as taken from implied federal funds futures readings), with the U.S. dollar unlikely to return to its 20-year high. Furthermore, energy prices (particularly natural gas within Europe) are unlikely to return to their record high of last year, buffered by plentiful inventories, which should aid both upstream and downstream industrial players. Combining these factors together, we have a softening in the macro-outlook (to a certain degree), and this has aided the base metal suite in the opening months of this year. However, it is important to note that based on the World Bank’s latest forecasts, global growth will be highly fragmented, with China forecast to be one of the only countries to record an acceleration in growth this year.
The impact of China’s reopening appears to be staggered for the base metals market, with investor sentiment and optimism over a faster than expected recovery in the country (following the announcement on 8th January that international travel would resume), buoying prices ahead of the Lunar New Year Holiday. However, as it stands, we are now witnessing this positive market sentiment come off the boil, given the slower than anticipated pickup in activity and reality of historically weak underlining economic readings. It is important to note here, that while peak cases of COVID-19 in major cities have already been reached (before pulling back), key growth sectors in the economy, such as the property market (which is less impacted by the spread of COVID-19 and more so by strict legislation), will have a longer recovery timeline, reflecting weak confidence. In a similar vein, the pace of Chinese growth, at least on the industrial front, will also be dependent on weather related issues, with power rationing a key headwind last year, negatively impacting both upstream and downstream players. Having said this, 2023 is set be an El Nino year which should result in higher rainfall in the country, supporting hydropower plants, while increasing domestic output for energy products like coal and a resumption in trade, with countries like Australia, could result in lower disruption overall. Therefore, we expect that as domestic demand returns over the next several months upon a reopening in addition to accommodative policy actions from both the PBoC and Government, base metal prices will be supported. If we turn to industry performance, we expect the best performing sector of demand to occur from investment into the green transition (favouring copper, nickel and aluminum), while construction demand will be moderate as investment into infrastructure is held back in part by a weak property sector. In addition to this, the ICE sector of the automotive industry is forecast to record muted growth, with overall demand for services outpacing that of goods. On a final note, it is important to take into consideration, that the reopening of the economy and improving power supply will also result in higher level of base metal production, and in the case of copper, in the absence of physical demand at present (with rising SHFE stocks, falling import premia and a record month in January of smelter output - driven by robust RC/TCs), it will be important to weight both sides of supply and demand.
The rising implementation of resource nationalism is one of our main risks to the supply outlook across the base metal suite, for not only knee-jerk price reactions, but the longer-term impact to global trade and premia. At the heart of the matter is Indonesia, following the implementation of the 2020 nickel ore export ban, while increased tariffs (or outright export bans) are set to be applied over the next few years for bauxite, copper concentrate, refined tin and nickel intermediary products. While the impact of these export tariffs varies depending on each commodity (for example, the impact on copper concentrates is lower than that of refined tin, given Indonesia stands as the world’s largest exporter of refined tin, versus being the eighth largest copper concentrate exporter); in any case, it is likely to lead to regional market tightness, especially for countries that then must adapt to alternative imports. As it stands, we forecast that the most significant risk of these moves will occur if countries move ahead with trade tariffs before suitable investment programmes (i.e., refining plants) have been established, with the Philippines a key concern, following the announcement that the country may implement a 10% export tariff on nickel ore. Please note here, the Philippines is the world’s second largest nickel exporter and currently only has two nickel processing plants in the country (versus 34 mines). In this scenario, global market tightness could ensure, rather than just regional tightness.
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Natalie Scott-Gray, StoneX Senior Metals Analyst, explains how Indonesia's tightening control over mineral exports, China's upcoming Politburo meeting and new carbon regulations are reshaping the outlook for nickel, aluminium, copper and other base metals. She discusses why supply-side risks may prove more influential than broad stimulus expectations during the second half of the year.
Copper prices are back in focus as physical supply tightens, inventories decline and demand strengthens. Natalie Scott-Gray, StoneX Senior Metals Analyst, explains why the copper market is becoming fundamentally tighter, how Section 232 tariff uncertainty and China's buying patterns are reshaping global flows, and why AI, electrification and grid investment continue to support the long-term outlook despite recent weakness in technology stocks.
Indonesia's tightening grip on mineral exports is becoming one of the most important supply-side drivers for global metals markets. As export controls expand and nickel production quotas are reviewed, supply constraints may outweigh demand uncertainty during the second half of the year.
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