- Relatively low metal prices due to uncertainty about trade negotiations
- Trade conflict, monetary policy, the dollar and the economy determine prices
- Base metals: prices are under pressure but will soon start to recover
- Steel: the global steel sector is cornered
- Steel (raw materials): pressure in steel sector affects iron ore and coking coal
Metals markets under pressure
Industrial metals markets have struggled so far this year. In the first quarter, sentiment in most base metals markets was still in full swing. Optimism about a trade deal between the US and China prevailed. The mood shifted at the start of the second quarter when trade negotiations between the US and China stalled. Economic activity in the US, China and Europe decreased as tensions increased. Prices fell.
The so-called LME index – which reflects the weighted trend in the prices of aluminium, copper, tin, nickel, lead and zinc – has risen on balance by just 1% this year. The price trend in the different base metals is almost identical, but there are differences per metal. While the aluminium price lost almost 6% until 2 July 2019, the price of nickel in particular has risen sharply this year by more than 13%. The zinc price recorded a modest increase of a meagre 1%, while the copper price is now down by almost 2% compared with 1 January.
Since the introduction of Trump’s import tariffs, steel prices have been under pressure. The import barriers created by the US President had a disruptive effect on the global steel trade flows. The sector is facing abundant supply, weak demand, higher purchasing costs and persistently low steel prices. These are challenging circumstances.
A combination of factors will become price-determining in industrial metals markets in the coming months. The most relevant are the trade war, the monetary policy of the central banks in the US (Fed), eurozone (ECB) and China (PBoC), the direction of the dollar and economic activity in many countries.
Base Metals: prices are under pressure but will soon start to recover
The trade conflict is the central theme in base metals markets. Chinese President Xi sets high standards to which Trump only wants to agree under certain conditions. But president Xi does not want to accept those conditions. Early July it became clear that the US and China plan to talk again. However, a quick solution to the trade conflict remains unlikely. The resulting uncertainty is reason enough for many investors to ignore base metals markets for the time being. This is because they believe that the longer the trade dispute persists, the greater the chance of a global recession. In that case, cyclical commodities are not a preferable investment. It also means that as long as there is no satisfactory solution to the trade conflict, prices of base metals will remain relatively low. However, as soon as a deal has been concluded, prices will start to recover strongly
Steel: the global steel sector is cornered
Steel production is growing fast without any significant end-user demand growth. Inventories at steel mills remain high and a lot of cheap steel is flooding export markets. The sector receives financial support through tax regimes or all sorts of stimulating economic policies. This results in the creation of a huge pool of inefficient and non-productive steel companies. These zombie companies have enabled the global production capacity to grow into an untameable monster. The steel sector has been struggling with this situation for a long time and for now, it will continue to affect the industry.
Steel (raw materials): pressure on steel sector felt in raw materials markets
While still relatively high, the price of coking coal has fallen by around 4% this year. This decrease was due to a combination of high stocks at steel mills, sufficient supply from Australia and a slightly weaker demand for coking coal. A burst dam in Brazil caused a supply disruption, while the demand for iron ore remained at the same level. As a result, the price of iron ore has risen by almost 70% this year. Next to that, the price is almost back to the level of 2014. For the time being, the pressure on the margins of steel companies remains high. This means that steel companies will seek cost reductions. Part of this involves the purchase of the cheaper types of iron ore.