Base metals have been enjoying a fantastic rally in recent times, thanks to a combination of circumstances. Positive macroeconomic outlook, huge liquidity boost, weaker dollar and China’s appetite for metals are all imparting buoyancy. The ongoing recovery in economic activities is seen supporting industrial metals consumption.
While the first half was weak due to the pandemic and related lockdowns, the second half is turning out to be positive. Beyond H2, there is high expectation the upbeat mood will spill into 2021 when economic activities are expected to reach near-normal. China, as usual, will have a significant role to play. The Asian major’s package of policy stimulus (infusion of about $100 billion earlier this week) will encourage spending on infrastructure projects which will mean higher consumption of industrial metals.
Prices rise gradually
Evidence of the positive outlook is already available. Copper prices that were languishing at around $5,000 a tonne in the first quarter of the year spurted to $6,000 in Q2. By end-July, they had risen further to $6,400 levels, and yesterday it tested the $6,700-per-tonne mark, the highest levels in over two years.
However, it has fallen to $6,600 today because of a slightly firmer dollar. Interestingly, the World Bureau of Metals Statistics has reported that copper suffered a supply deficit of about 150,000 tonnes in H1 2020.
But even more interesting is that nickel, zinc and lead, too, have witnessed rates rising to multi-month highs. For instance, zinc has moved from $1,900/tonne in Q1 to $2,200 by end-July, and during the same period nickel went from $11,500 to $13,600.
Revival in demand
This is despite high surpluses estimated for nickel, zinc and lead in the first half of the year. This is evidence that the risk appetite among market participants is rising. Inflow of speculative capital as seen in rising net long positions has resulted in a price surge.
In fact, most base metals are now where they were at the start of the year, and given the optimistic outlook the rally has the potential to run further. The scale of fiscal and monetary policy support provided by countries is adding to the upward traction.
While China, as usual, is expected to lead revival of consumption demand, there is a belief that the demand outside of China may also have turned the corner, going by stabilising stocks at LME. At the same time, supply concerns have not vanished altogether. There was dislocation in several mines, especially in South America, where the spread of the pandemic is alarming.
Overall, it appears the worst is over for the base metals complex. From here on, they will be on path of further recovery. At the same time, it must be recognised that the market participants are overlooking the risk of a second wave of coronavirus which may entail more lockdowns and risk of increased trade tensions between the US and China.
Although global growth is set to shrink in 2020, the prospect of a rebound in 2021 is bright and that positive sentiment is driving the metals market higher now. The positive correlation between global economic growth and industrial metals consumption is, of course, well-known.
(The writer is a policy commentator and commodities market specialist. Views are personal)