Base metals

Mounting evidence of a slowdown in global economic activity and an associated souring of investor sentiment ensured that base metals prices remained under pressure during the last quarter of 2019.

And while it is expected that the global economy will avoid an outright recession, growth is likely to be subdued in 2020.  

This article first appeared in Mining Review Africa Issue 1, 2020

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It is for this reason that there is a downbeat forecast for steel and iron ore prices in 2020.

AUTHOR: Caroline Bain, Chief Commodities Economist, Capital Economics

This owes to the ongoing rebound in iron ore output following severe disruptions in early 2019, as well as the view that the strength in construction activity in China is on borrowed time. That said, the outlook for copper is better than for the others.

Copper to weather the storm

Worries about the health of the global economy and rising trade tensions weighed on the price of copper in the last half of 2019 and led to an accumulation of a net short position by investors in the futures market.

Read more about base metals

Weaker global growth will probably continue to weigh on prices in the coming months. However, it is expected that growth will be on a slightly better footing towards the end of 2020. If this proves to be right, copper is well placed to outperform other base metals.

Indeed, declining ore grades and years of under-investment in new mine projects means that copper supply will continue to be constrained this year. As such, it is expected that the copper market will remain in a deep deficit.

Looking ahead, a key element in the long-term copper price forecast is that weaker global economic growth is expected. In particular, it is forecast that growth in China will slow to just 2% by 2030. What’s more, as the Chinese economy moves away from investment-led growth, there will be softer growth in some copper-intensive sectors and an outright decline in demand for new housing.

That said, it is expected that the negative impact of a decelerating Chinese economy on copper demand will be more than offset by three key factors:

First, copper is used heavily in several green technologies, which are growing rapidly and look set to gain critical mass over the next decade.

Second, even though GDP growth is expected to slow slightly in many emerging economies, there is scope for markedly higher copper consumption.

Third, and most crucially, the thin pipeline of copper projects will ensure that the copper market remains in a deficit. Prices should peak at an annual average of US$8 470/t in 2025 in real terms.

But, in the final decade it is suspected that the real price of copper will be appreciably lower as both refined and scrap supply rises.

Downbeat on the prospects for steel

The prices of US and Chinese steel both fell in Q3, 2019. It is forecast that the price of US steel will remain low in 2020, though ongoing output cuts by producers should eventually put a floor under prices. In contrast, it is believed that Chinese steel prices have much further to fall.

For one, the downturn in land sales is a clear sign that robust construction activity in China is on borrowed time. And despite the uptick in Chinese manufacturing activity, a full-blown recovery is still a long way off. Further ahead, the ongoing structural slowdown in China and a move away from investment-led growth should weigh heavily on the price of Chinese steel.

Iron ore price to fall sharply

The price of iron ore was broadly flat in 2019, but it remains elevated, following the collapse of a tailings dam at Vale’s Brucutu mine earlier in the year and a cyclone in Australia.

These led to a large loss of iron ore supply which, together with robust demand for steel from China’s construction sector (almost all the world’s iron ore is used to make steel), is likely to result in a sizeable market deficit in the iron ore market in 2020.

However, much of the shuttered iron ore capacity has now been restarted, as partly evidenced by the recent rise in export volumes at Australia’s Port Hedland – a major iron ore port. Consequently, it is expected that iron ore prices will fall sharply as the market moves into a small surplus.

As of Q4, 2019, the price of nickel was up by over 50% compared to the previous year. The catalyst was the announcement that Indonesia will implement its ban on exports of nickel ore in January 2020, two years earlier than expected, which raised fears of a looming supply shortfall. However, three key reasons makes one sceptical that the rally will last.

First, according to Capital Economic’s proprietary model, global demand for nickel already declined in 2019 and it is expected to slow further in 2020.

Second, some of the near-term loss in supply could be met by Chinese port stocks, additional processing of nickel ore in Indonesia and increased exports from the Philippines.

Finally, it is estimated that nearly 200 000 t of refined nickel have flowed into off-exchange stocks since 2017. This ‘hidden’ supply should further mitigate the loss of output from Indonesia.

Aluminium could benefit from stabilisation

Weak demand will also weigh on the price of aluminium in the near-term. But like copper, aluminium prices should benefit from a relative stabilisation in global growth in the second half of 2020.

That said, the price of aluminium is expected to underperform copper, mainly because it is anticipated that there will be stronger growth in refined output of aluminium. (Indeed, the ramp-up in production at smelters in Southern China will probably offset the loss of output from the shut facilities in Xinjiang and Shandong.

 Zinc and lead surplus delayed, but not averted

In the latter part of 2019, the price of zinc increased recently despite a continued rise in mine supply.

Several shutdowns outside of China, most recently at Vedanta’s Skorpion refinery in Namibia, have stoked supply worries amid meagre inventory levels.

On the demand side, in contrast to robust steel output in China, production growth of zinc-galvanised steel has fared poorly in comparison.

Despite the near-term headwinds to zinc supply, it is forecast that the market will swing into a surplus by 2020 as the smelter capacity gradually ramps up to meet the increase in mine production.

Given this backdrop, it is expected that the price of zinc will steadily declining until 2021, when somewhat stronger global growth should provide a lift.

It is a similar story for zinc’s sister metal, lead. The price of lead has risen strongly since July 2019 on the back of the closure of Nyrstar’s Port Pirie smelter in Australia.

Although the smelter accounts for just over 1% of global refined lead production, depleted exchange stocks have added fuel to the price rally. But given tepid demand, the price of lead is predicted fall in 2020 as output recovers and the market moves into a surplus.

Tin turnaround

Meanwhile, tin retains its title as the worst performing base metal of 2019.

Production cuts at Chinese smelters (equivalent to 5% of global production) should be more than offset by an increase in Indonesian output. As such, global tin supply is likely to be a touch higher and remain elevated in 2020, weighing on prices.

In conclusion

It is expected that the supply of most base metals will remain constrained in 2020. However, low prices should increasingly force producers to curtail output and this, coupled with a broad-based drawdown in exchange stocks in recent years, is likely to raise concerns over a shortfall of supply as demand slowly begins to revive.

About the author: Caroline Bain is the Chief Commodities Economist at Capital Economics, with overall responsibility for the Commodities Overview, Energy and Metals services.

She is also the author of The Economist Guide to Commodities. She has degrees in economics from Trinity College Dublin and the University of London.