Base Metal Commentary - Feature Article
By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
THE BASE METAL SUITE - METAL FUNDEMENTALS 2021
Upon the close of 2021, the base metal suite had posted a 32% Y/Y jump, marking the best annual performance since 2009. This robust gain was a result not only of favourable macro factors (such as the continued release of stimulus in the west, underpinning economic recovery), but also supportive micro factors, particularly on the supply side of the equation. These combined forces offset headwinds over much of the year stemming from a strengthening U.S. dollar and impact of lockdowns across the globe from COVID-19’s various mutations, not to mention the impact (as result), on global supply chains.
BLOOMBERG BASE METAL SUITE PERFORMANCE OVER 2021
Source: Bloomberg, StoneX
BLOOMBERG BASE METAL SUITE PERFORMANCE OVER 2021
Source: Bloomberg; CRU, StoneX
Base Metal Fundamentals
TIN MARKET BALANCE
Source: Bloomberg; CRU, StoneX
Tin was the single best performer across the base and precious metals markets last year, rising by 90% and outperforming the base metal suite since the start of the year. The key driver behind this performance (at least over H1 2021), wasn’t per se based on outright fundamentals, but instead due to the impact that supply chain issues placed on tin, given its small market size compared to other metals like copper or aluminium. Indeed, if we look at production level in H12020 in Asia (which is responsible for 40% of global supply to the US and Europe), production lifted by 9% Y/Y during this time, comfortably providing enough material to countries such as China (please note SHFE tin stocks had jumped 44% by April 2021). Therefore, the issue arose not as a result of the global market posting constrained supply, but rather that material from the east couldn’t easily get to where it was needed in the west, where demand was growing. As a result, the LME Cash-3M spread expanded to its largest backwardation in 26 years in Q1, reaching above $2,400/t. However, supply tightness did materialise over the H2 2021, when the world’s third largest tin producer Malaysia Smelting Corporation announced force majeure on 7th June (with the company only having restarted production at the end of 2020). As a result, output out of Malaysia (the world’s third largest producing country), dropped by 40% Y/Y to its lowest level on record. Making matters worse, domestic issues in China, ranging from environmental inspection, limited reservoir water (to feed hydropower) and falling coal stocks, resulted in Chinese smelters posting a production decline of 9% Y/Y in H2, its lowest levels since 2019.
ALUMINIUM MARKET BALANCE
Source: Bloomberg; CRU, StoneX
Aluminium was the second best performing base metal last year, jumping by 44% Y/Y. In simple terms, the key drivers behind this impressive performance came from slower than expected supply growth (mainly on the primary side), while demand remained resilient on the back of healthy stimulus supporting consumption outside China, and a global lift in demand towards green technologies, with aluminium being utilised in the construction of lightweight vehicles and renewable energies such as solar.
Focusing on supply, despite global refined aluminium estimated to have recorded a record high last year, concerns over future supply are likely to dominate headlines this year. Indeed, supply in China (which is estimated to have lost 3.3-3.8Mt of capacity in 2021), has come under tremendous strain not only from China’s Dual Control Mandate (where total energy consumption and energy intensity was monitored for smelters), but also from the power crunch that occurred in Q4 in the country, where thermal coal, which powers 54% of China’s electricity, was in scarce supply resulting in power rationing in the country.
Focusing on supply, despite global refined aluminium estimated to have recorded a record high last year, concerns over future supply are likely to dominate headlines this year. Indeed, supply in China (which is estimated to have lost 3.3-3.8Mt of capacity in 2021), has come under tremendous strain not only from China’s Dual Control Mandate (where total energy consumption and energy intensity was monitored for smelters), but also from the power crunch that occurred in Q4 in the country, where thermal coal, which powers 54% of China’s electricity, was in scarce supply resulting in power rationing in the country.
ZINC MARKET BALANCE
Source: Bloomberg; CRU, StoneX
The zinc market recorded a surplus last year of just under 100,000t, after mine production came in below market expectations, while demand (particularly for brass and galvanising steel used in sectors such as construction and the automotive industry), rebounded above our expectations. This resulted in a balanced market, where previously we had forecast a more significant surplus. Arguably one of the most important aspects to understand in the market was the actions taken from China mid-year, where they attempted to cool commodity prices by releasing inventory into the market from state owned reserves. We estimate that 180,000t of zinc were released in batches last year, and this was the single driver that moved our total market balance from a deficit into a surplus for 2021.
COPPER MARKET BALANCE
Source: Bloomberg; CRU, StoneX
Copper started last year with arguably the best fundamentals of the base metal suite, where tight supply and improving demand were set to see the market face a fifth year of deficits. However, copper ended-2021 as the fourth best performer (rising by 25%), recording a market surplus of around 160,000t. In simple terms, the key driver behind this result (aside from the macro picture), was the fact that mine production surprised to the upside, helping to boost refined production to 23.9Mt. Indeed, within China itself (which is responsible for 40% of global refined production), copper was largely unscathed by power rationing in Q4 in the country (given its lower energy-intensity to other base metals such as aluminium). In addition, we also saw supply in the country benefit from rising scrap volumes.
NICKEL MARKET BALANCE
Source: Bloomberg; CRU, StoneX
Nickel’s price performance last year, in which it jumped 25%, was driven by the market flipping into a deficit of around 120,000t, from a 120,000t surplus in 2020. The key causes of the market falling into a deficit came from robust demand from nickel’s two key end uses within stainless steel production (which jumped by 14% Y/Y to a on record high, in large part driven by Indonesian expansions) and its use in the cathode section of lithium-ion batteries. Meanwhile, supply faced COVID-19 related disruptions in main producing regions of Indonesia and the Philippines, while non-NPI production saw almost 100,000t of production come offline as a result of issues such as flooding at major producer Norilsk nickel and labour strikes at Vale’s Canadian Sudbury complex.
LEAD MARKET BALANCE
Source: Bloomberg; CRU, StoneX
Despite lead recording a strong price recovery in 2021, rising by 16%, it lagged the performance of the other base metals, in part due to lead’s characteristics (with two-thirds of supply coming from secondary material), reducing supply side concerns that other metals like copper faced. Having said this however, lead’s price performance was robust, and this in part was due to a tightening in lead’s fundamentals, although it is important to note here that this tightening was a regional based story. Indeed, while China was awash with tin, in the west (where the majority of demand arose in 2021), downstream producers struggled to get hold of enough material as a result of supply chain bottlenecks, freight conditions and indeed limited exports out of China. In addition to this, western supply was placed under more pressure following the floods in Germany, which saw Berelius’s Stolberg plant enter force majeure from July.
Stocks Telling the Story
Over much of 2021, while looking at market fundamentals on a global scale did help indicate market trends for the metals (such as an overall build in demand or pull down in available metal inventory), as we can see below, understanding regional fundamentals was more important than ever, particularly given supply chain dislocations, which were a key driver behind historically high LME Cash-3M backwardations.
GLOBAL EXCHANGE STOCKS (on warrant) BY METAL
Source: Bloomberg, StoneX
LME BASE METAL CASH-3M SPREADS
Source: Bloomberg, StoneX
2022 Outlook - Metals Market Outlook The Path to a New Normal
Please note, we will be providing a detailed insight on our outlook for the precious and base metal markets in a presentation ‘Metals Market Outlook – The Path to a New Normal’ on 20th January at 8.30 GMT and 15.30 GMT. If you would like to register, please click the link here.
Source: StoneX
- Base Metals
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