Brexit had limited impact on industrial metal markets

by: Casper Burgering

In this publication: Brexit spurred industrial metal price volatility, but had little overall impact. Base metal prices set to rise further this and next year on market shortages. Steel prices expected to remain stable in coming three months due to summer season.

Industrial Metals Monitor-July 2016.pdf (668 KB)

Impact Brexit on metals market relatively low

The UK only accounts for 1% of the annual global consumption of base metals and global steel production. Due to this modest share in industrial metal markets, the Brexit vote had little effect on prices. Brexit contagion to other economies is now the biggest risk. Uncertainty among investors is another major concern. How the referendum result will play out in terms of business confidence remains to be seen. This will become clearer in the course of July. Due to Brexit and the ensuing uncertainties, ABN AMRO has reduced its forecasts for global economic growth. The main reason for the downward revision is that the heightened unrest will scare off investors. Investments will slow and businesses will hire fewer employees. In the first instance, these adverse effects will mainly materialise in the UK. As long as the Chinese economy is not affected, we will maintain our metal price expectations.

Base metal prices recover, ferrous metal prices weaken

Base metal prices became more volatile in the run-up to the Brexit referendum and remained unsettled in the immediate aftermath of the shock result. In the early morning of 24 June, base metal prices fell sharply, but then bounced back within less than two days. Copper, nickel and zinc prices recovered relatively quickly, while the aluminium price took longer to regain its former level. The fundamental trends in the copper, nickel and zinc markets are relatively favourable and provide fertile ground for a price revival. In the aluminium market, by contrast, oversupply is still dampening prices. In the meantime, however, the aluminium price has resumed the upward trend, partly thanks to a pick-up in demand. The Brexit vote went virtually unnoticed in the ferrous metals markets. Global steel prices took flight at the start of 2016, but fell back slowly during the second quarter as demand from both traders and end users weakened.

Mid-year review

graf1Industrial metal prices got off to a slow start in January. The first month began tumultuously, with an immediate sharp fall in base metal prices. The Chinese currency was devalued, triggering a negative reaction on the stock markets. The nervousness about the Chinese economy soared to new heights, feeding the unrest in base metal markets. The period from February to April brought a recovery, with both base metal and ferrous metal prices gaining strongly. Since May, however, fears have regained the upper hand, once again due to uncertainty about the Chinese economy and a possible Fed rate hike. These concerns will continue to exert a strong grip on metal prices for the rest of 2016, so that the risks will remain high. At the beginning of July all industrial metal prices had increased relative to their levels on 1 January. Global steel, zinc and iron ore prices have made the strongest gains, while the copper price has lost only marginally.

Sufficient iron ore available in China

Iron ore is abundantly available in China at the moment. Accounting for 50% of global steel output, China is still the world’s biggest consumer of iron ore. China is rich in iron ore reserves, but this ore is of relatively poor quality and increasingly difficult to extract. Hence China’s continuing dependence on imports, notably from Australia. And the pace of imports was stepped up even further this year, though there is no immediate need for so much iron ore. Because steel production cannot be expanded fast enough to keep up with the growth in iron ore imports. Since 2009 steel output has risen by 41%, while iron ore imports have accelerated by 52%. Stocks in ports and steel plants are high, which means that iron ore will remain plentiful in China for the time being. The importation of iron ore should flatten off at some point. Because if China cuts its steel production as promised, the demand for iron ore will decrease.

Steel price stable during third quarter

graf2Global steel prices have lost ground since early June. The slump in prices is stronger in China, the CIS and Latin America than in Europe and the US. This is mainly due to the import restrictions introduced in Europe and the US to keep out relatively cheap steel from China and Russia. As a result, China and Russia lost large sales markets and prices dropped. Demand for steel is typically weak in July and August and we expect the steel price to remain stable on balance in the third quarter. Weaker demand for steel also impacts on iron ore and cokes, though demand for these products held up relatively well into the beginning of July. This gave prices some upward momentum in June. However, with the summer season just ahead, we also assume that these prices will remain stable in the third quarter.

Stocks leaving LME warehouses

On balance, the stocks of base metals in LME warehouses have declined since the start of this year. Aluminium and nickel stocks have decreased by, respectively, 22% and 17% since 1 January, while copper and zinc stocks have shrunk by about 5%. The sharp drop in LME stocks is partly due to the new warehousing rules – including a considerable shortening of the permitted warehousing period – but also because of the more frequent use of base metals as collateral for finance deals. May saw an unexpectedly sharp upsurge in copper exports from China. Much of this was shipped directly to warehouses in Shanghai, but not to end users. This led to a strong increase in copper stocks in early June, feeding uncertainty about the state of the Chinese economy. Nickel stocks had been on an upward trend since 2012, but started to decline again at the beginning of . Availability remains high, however.

Base metal prices set to rise further, but risks remain

graf3Base metal prices will continue to rise from their current level this year. This projection assumes that the Fed will not raise interest rates this year, that the Chinese economy remains stable and that the Brexit contagion to the global economy will be limited. The aluminium price continues to be driven by oversupply. Stocks are still relatively high and supply is outpacing demand. At the current relatively low prices, however, production capacity cuts are very likely as many aluminium producers are sustaining losses. The copper price will increase this year. However, copper also poses the greatest risks because of the extremely cyclical nature of this metal. The price depends to a relatively strong degree on macro trends, such as the state of the Chinese economy, the oil price, the uncertainty about a Fed rate hike and the dollar. That said, the fundamental trends also remain important for the long-term direction of the copper price. And viewed from this fundamental perspective, the copper price will receive support from sustained shortages both this year and next.