Optimism about China drives up industrial metal prices

by: Casper Burgering

In this publication: Accelerating economic growth creates strong platform for cyclical industrial metal markets. Base metal shortages in 2018 herald stronger prices. Steel price in Europe will advance further in Q4 on relatively strong demand.

Industrial Metals Monitor-Oct 2017.pdf (319 KB)
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Accelerating economic growth supports metal prices

The global economy is doing well. Growth already beat expectations this year and the global economy will continue to quicken in 2018. This sets the stage for a further strengthening of the – highly cyclical – industrial metal prices. Many economies in Asia (notably China) are settling into a more stable economic growth trend. That is good news, because this region is the epicentre of demand for industrial metals. Europe – accounting for a share of about 15% in the demand for industrial metals – is also a formidable customer. Economic sentiment in Europe is extraordinarily upbeat. The US presents a more mixed picture. Many confidence indices are relatively high, but sales of new-builds and cars remain comparatively weak. On balance, ABN AMRO expects the US economy to continue on an upward trajectory in 2018. All in all, this provides a solid basis for metal markets.

Chinese metal imports still growing, but more slowly

Chinese industrial metal imports have gone through peaks and troughs over the years. Import growth slowed sharply just after the 2008-2009 crisis, and has remained relatively low since 2014. This flattening growth is related to the cooling of the Chinese economy and China’s transition from an investment-driven to a consumption-led growth model. Despite the ongoing cooling of the Chinese economy, China’s appetite for industrial metals remains high, especially because of the relentless urbanisation trend and the proposed mega-investments in infrastructure. China’s Belt & Road initiative, involving the construction of a link between Europe and Asia, will in itself demand massive investments, and not just in China. Given that China consumes about 50% of all industrial metals, it will continue to stamp its mark on industrial metal trends for the time being.

Strong price increases for steel and base metals

Base metal prices have put in a stellar performance this year. Aluminium, copper and zinc all soared by 23% to 26% since the start of this year. Nickel also jumped, but by several percentage points less. The strongest price rises did not occur until August, however. Alongside market-specific factors (notably tightness in the various markets), the improving mood in China was also a major catalyst. That said, ferrous metal prices remained on the sidelines, indicating that fundamental developments play a stronger role here. Moreover, the speculative share in these markets is considerably lower than in base metal markets. The global steel price jumped over 10% – on strong demand – while raw materials used to manufacture steel (iron ore and coking coal) lost ground. Plentiful supply in both markets is the main reason why the prices are in a downward spiral.

Strong fundamentals underpin base metal markets

The market balances in base metal markets will be negative in 2018, with demand outstripping the available quantity of the metal. Volume-wise, the biggest shortage is in the aluminium market, amounting to 2.8% of consumption in relative terms. The shortage in the nickel market is also high in relative terms – 3.8% of consumption – but considerably lower in volume terms. The zinc market is heading for a shortage of 1.1% of consumption in 2018. The copper market, finally, is virtually in balance, with a tiny surplus running to a mere 0.1% of consumption. The picture is more mixed in 2019, with a new (marginal) shortage in the copper market, while the zinc market will be saddled with a surplus of 0.7% of consumption. Base metal stocks will continue to shrink by an average of 18% until end of 2019. The nickel and aluminium markets will witness the strongest decline in the volume of reported stocks.

Shortages in 2018 create strong foundations for prices

The shortages in 2018 create a good basis for strengthening metal prices, although the pace will vary between markets. The copper market will be virtually in balance in 2018, so that price gains or losses will be driven by non-fundamental developments. As for the aluminium and nickel markets, stocks will remain relatively high, putting a drag on the price trend. The thought of these elevated stocks – possibly combined with production restarts if prices are relatively high – will dampen any strong upward price momentum. The most uncertainty lies in the zinc price. For now, we start from a zinc shortfall in 2018, which will be sufficient to lift prices further. However, the extremely sharp price surge in 2017 will elicit a supply reaction from producers keen to cash in on the higher prices. Several restarts were already on the agenda, but an acceleration in this process looks likely. If this scenario becomes reality, the zinc price will fall.

EU steel price lagging behind global price

The European steel sector is benefiting from the revitalised activity in the construction sector. Although steel construction is relatively limited in Europe, the sector remains an important customer for steel products in this region. The higher scrap price has also inflated the costs for manufacturing high-grade steel. This, too, has contributed to the higher steel prices. We assume that the price of steel in Europe can advance further in the fourth quarter, historically a strong period for demand. The steel price in Europe rose by 10% this year versus an average gain of 16% in China, Latin America and Russia. In the US, however, the steel price fell by 2%. Investment growth in US infrastructure works was unexpectedly subdued, which deflated sentiment. Steel imports also spiked ahead of the introduction of Section 232, which will call a halt to the importation of cheap steel.

Trends in China dictate direction of global steel sector

Representing 50% of global production, China plays a pivotal role in the fortunes of the global steel sector. As a result, reforms in the Chinese steel sector were greeted with enthusiasm around the world, as more market balance will make the steel sector stronger in the long run and curb cheap Chinese steel exports. China has previously announced ambitious plans, but this time they evidently mean business. Cutting back overcapacity is one important objective. But the environment also stands to benefit, as the steel sector is still one of the most polluting heavy industries in many Chinese provinces. So that kills three birds with one stone: less overcapacity, fewer exports, less pollution. Volume-wise, many stories are flying around, but we hope to get more concrete details during or after the 19th National Party Congress. In any event, in view of the massive infrastructure investments that China proposes to make (at home and abroad), we expect long-term demand for steel to hold up well.