Positive sentiment drives up base metal prices

by: Casper Burgering

In this publication: Positive economic sentiment and encouraging signs from major metal-consuming sectors. Base metal prices to stay on upward trend in Q1, but uncertainties remain high. Pressure on prices for iron ore and coking coal persists amidst reviving supply.

Industrial Metals Monitor-January 2017.pdf (360 KB)

Global economy maintains growth rate

gdp jan 2017The outlook for the global economy is positive for 2017 with growth estimated at 3.4%. Growth in the eurozone is sustained, but not yet spectacular (+1.4%). One favourable sign is that the economic sentiment index rose in December to its highest level in five years. This index is a good indicator of economic activity in the eurozone and such a strong increase lays sound foundations for 2017. The Chinese economy will continue to expand in 2017, but at a gradually decelerating pace: we expect 6.5% growth in 2017, falling to 6.0% in 2018. Our base scenario rules out a hard landing. However, significant risks remain in the form of high debt positions, weak private investments, overcapacity and geopolitical tensions. A stronger slowdown of the Chinese economy would also have far-reaching consequences. Confidence in the US economy is high. Recent figures underpin this view: unemployment is low and car sales in the US are recovering strongly.

Year-end rally in manufacturing PMI

pmi-jan-2017Sentiment in base metal markets was upbeat at the start of 2017. The global economy produced favourable macro data and the largest metal-consuming sectors also sent out encouraging signals. The construction and automotive sectors in China, the US and the eurozone grew further during 2016. This inspires confidence for the first quarter of 2017. In late 2016, activity in the industrial sector also gathered steam, which is reflected in the readings and stronger increases in the purchasing manager indexes for the manufacturing industry. That said, uncertainties remain high for 2017. These could materialise into economic headwinds or tailwinds: more Trump-induced protectionism (headwind), the prospect of a stronger dollar (headwind), optimism about further worldwide monetary stimulus (tailwind) and improving Chinese macroeconomic data (tailwind).

Ferrous metal prices off to weak start

prices jan 2017At the start of 2017, base metal prices remained upward bound, while the prices of raw materials for manufacturing steel (iron ore, coking coal) lost ground. The prospects for base metal markets are still bright for the first quarter, buoyed by positive worldwide economic sentiment as well as solid underlying fundamental trends. Demand in the aluminium market remains robust (particularly from the construction and automotive sectors). That is positive for the price. But continuing high availability is preventing strong price gains. The copper price is also holding on to its upward trend, though erratic stock patterns constitute an obstacle in this market. The nickel market has seen LME stocks grow in the past two months, leading to weaker prices. We see a price rise for nickel in the offing thanks to the anticipated shortages in 2017. However, the relatively high nickel stocks and uncertainty about demand for stainless steel will put a brake on the pace of this increase. The zinc price will rise further in 2017, driven by the market imbalance and the rapid worldwide recovery in the construction sector.

Dynamic scrap metal markets bring more volatile prices

Owing to the dwindling availability of some types of scrap aluminium in the US, scrap metal users in the US are prepared to pay a premium – a clear indication that developments in scrap markets impact on non-scrap metal price trends. Scrap copper and refined copper show a particularly close price correlation. Price trends in the refined markets remain a key indicator for the direction of scrap prices. And the good news here is that investor sentiment in base metal markets was positive at the start of 2017. We see base metal prices continuing to climb in the first quarter, although at a relatively mild pace. The mood in this quarter will be mainly determined by Trump’s inauguration as President on 20 January and his subsequent policies. That is an uncertain factor for many investors. At the end of January, activity in the metal markets will also be dampened by the seven-day holiday period in China to celebrate the Chinese new year.

Aluminium stocks still relatively high

Nickel stocks have shown strong growth since 2013, reaching a peak in June 2015. In this period, LME nickel stocks swelled by 215%, whereas the LME stocks of other base metals shrank by an average of 33%. Since nickel peaked in June 2015, the LME stocks of all base metals have declined, with outbound flows averaging 19% until the end of December 2016. The strongest drop was recorded in aluminium stocks and this trend is giving a positive impulse to market sentiment. The decrease in LME stocks is related to the higher warehousing premiums in LME warehouses as well as the increased use of metal from LME warehouses as investment collateral. To sum up, the decline in LME stocks has little bearing on the actual end consumption and can give a distorted picture.

Coking coal price falls and margins improve

The three-month rally of the coking coal price in 2016 ended in mid-November, before turning into a sharp price correction in mid-December. In the Industrial Metals Monitor of October 2016, we already expressed concern about the strong price rally in the coking coal market and predicted that this would trigger a supply reaction. With the price correction having been under way since mid-December, the market appears to be moving towards a new balance. In any events, the price correction is having an impact on the difference between the steel price and the total price for raw materials for steel manufacturing. This is recovering strongly, but is still about 8% below its 2016 average. We expect the price trends in the ferrous metal markets to present a diverse picture. Raw materials (iron ore and coking coal) will stay on a downward trend due to more ample supply. The price for steel may rise a little further, also driven by relatively lively demand. This price movement will be sustained until the spread between the steel price and raw materials prices normalises.

Scrap steel price recovers

North and South European steel prices show a parallel trend over time, with an average difference of 6%. The scrap price in Europe broadly follows the steel price, although the dynamics in the scrap market also play a role. The growing output of steel producers that make use of the Electric Arc Furnaces (EAF route) – which mainly use scrap – and the supply of scrap are particularly relevant in this context. But the lower prices for iron ore and coking coal are also having a negative impact on the scrap metal price. When these raw materials are relatively cheap, it is more lucrative for steel plants with a Blast Oxygen Furnace (BOF route) – which use more iron ore and less scrap – to switch over to the most cost-efficient method.