After being hit hard by the Covid-19 pandemic, it appears, as of mid-December, that the base metals complex is currently in recovery mode and industry observers are largely optimistic that it could continue to trend upwards, albeit with modest ups and downs, through 2021.
That would be a welcome relief after all the volatility that the base metals market experienced in 2020 - a year that Geordie Wilkes, head of research for Sucden Financial, described as a story of two halves. It was an amazing year for the base metals complex, Sergey Donskoy, a metals and mining analyst for Societe Generale, said, given that in less than six months the market went from the depths of despair to prices that, while not at record highs, are actually above the past few years annual averages.
That recovery has been spearheaded by China, which Boris Mikanikrezai, a metals analyst with Fastmarkets MB, said is not surprising given that China has been the only country to experience a V-shaped recovery, which is a feat that could be largely attributed to a combination of its success in controlling the virus and its targeted stimulus measures. He said that has been very important to the market given that China is responsible for about 60% of global base metals consumption.
John Mothersole, director of research for IHS Markits pricing and purchasing service, said that it clearly was the pandemic that has been at the root of the recent volatility of the base metals market. He said that after there had been a slow deceleration in global manufacturing activity in the second half of 2019, largely due to trade issues, there had been hope, especially with a US-China Phase 1 preliminary trade deal, that the manufacturing sector, and therefore base metals demand, would see improvement in 2020. But then the pandemic hit and everyones expectations were revised accordingly, he noted.
Wilkes agreed, observing that when Covid-19 first hit in the first quarter of 2020 there was a lot of base metal demand worries and a lack of risk appetite, which, in turn, caused prices to fall significantly throughout the complex. However, once we got through the initial lockdown phase and when more stimulus measures were added into the equation, we saw macroeconomic conditions start to improve and most metals particularly copper and aluminium making some pretty strong gains, with copper reaching $7,770 per tonne early in December, up from a low of $4,371 per tonne in March and aluminium rising to $2,000 per tonne from $1,462 per tonne.
Wilkes said that the recent base metal recovery would not have occurred without the curtailment of supply, social distancing and capacity restrictions coupled with stimulus measures. It has helped that Chinas economy has come roaring back, he said, But despite all of this, there continues to be some large surpluses in the base metals complex.
Mothersole said that is partly because in 2020 there had also been a two-track global economy China and everyone else. He noted that it has largely been because of the relatively good performance of the Chinese economy that the markets, particularly after the third quarter of the year, started to have a change of sentiment to the perception that the glass is half full as opposed to being half empty.
China surpassed expectations
China even surpassed our expectations for increased consumption of such base metals as copper, aluminium and zinc, Donskoy said, noting that also, contrary to recent trends, China is currently a net importer of aluminium. He said that was partly because, with its scrap metal restrictions, companies had to increase their use of primary metal. He pointed out that there has also been a decline in copper scrap imports, particularly of low quality scrap, because of these restrictions.
There were other factors that have also played into improved base metals sentiment. For example, there has also begun to be a recovery in base metal demand outside of China. In fact, Donskoy said it is possible that within the next 12-18 months that broadly, across the base metals complex, demand in mature economies will also return to more or less normal levels.
Also, Mikanikrezai said that given that several countries have begun to give vaccines emergency-use authorizations, he believes that the Covid-19 pandemic could be under control sometime in the second half of 2021. This, he said, comes after the contraction of base metals demand that occurred in many countries outside of China in 2020 had resulted in a lot of depletion of inventories. But as economic activity improves, he said, there will likely be some restocking, which should result in stronger refined metal consumption.
Base metals, particularly copper and aluminium, have also begun to benefit from what Mikanikrezai termed as the green transition megatrend, including greater connectivity, green energy transmission and renewable energy generation. He said that copper has benefited from this, given its use in the wiring for both electric vehicles (EVs) and for charging infrastructure. Wilkes agreed, stating that in addition to EV-related demand, there is a lot of optimism surrounding green economy measures, particularly in China, including for green energy, high-speed rail and 5G internet infrastructure.
You dont necessarily see that significantly affecting the physical consumption of copper outside of China quite yet, but the market is really exciting looking out another two to three years, Mothersole said. I think that is why recently copper pricing might have gotten ahead of the markets fundamentals.
While aluminium has also benefited from the fact that there has been some modest increase in the production rate of EVs, particularly in China, which has been leading that charge, Donskoy said that, given that this move is in early days, it is not of a magnitude to make a difference in aluminium consumption. He maintained that the bigger impact will come from the high-voltage power-generation lines that are increasingly being made from aluminium rather than copper, because they are lower weight and cost, while still offering high conductivity.
Yang Cao, a senior metals analyst with Fastmarkets MB, said that he believes that Joe Bidens win of the US presidential election could give base metals prices at least a short term boost, given the likelihood that US fiscal stimulus policy might be launched faster and smoother. In addition, he said that he believes that under Biden there could be an easing of trade conflicts as well as the passage of a large pandemic relief bill and approval of $2 trillion in accelerated investment. He plans to create 1 million new jobs in the US auto industry, upgrade 4 million buildings and spur the construction of 1.5 million sustainable homes and housing units, Cao said, stating that all those measures should be positive for aluminium demand in the medium term and provide support to aluminium prices.
Clearly not all base metals are equal. Donskoy said that while there could be some cooling off in base metals prices going into 2021, if Chinese consumption remains strong and there is a recovery in the mature economies, the downside for both copper and aluminium could be reduced. But the outlook for aluminium could be more difficult than for copper, especially if, as I suspect, China doesnt play as big of a role in that market as it did in 2020, he said. But overall, he said, base metals should see some progress toward the second half of 2021. That is keeping everyone in some sort of positive anticipation.
Copper to shine?
Carlos Risopatron, director of economics and environment for the International Copper Study Group (ICSG), described 2020 as being 2009 in high heels, given the strong restocking of refined copper in China coming amid the pickup of the Chinese economy and a global shortage of copper scrap. As such, ICSGs latest estimation was for global apparent refined copper consumption to inch up 0.2% for the year to about 24.5 million tonnes.
Donskoy said that while copper demand was down early in the year, somewhat surprisingly it spiked in the middle of 2020. But toward the end of 2020 we saw underlying apparent consumption more or less normalizing, in part because of increased purchases going into inventories for both copper and such copper intermediate products as wire, plate and tubing.
The biggest impact upon the copper market has been the stimulus measures that China initiated, as well as the strong buying and stockpiling of metal there, Wilkes said, noting that this helped Chinese GDP to return to growth on the back of stronger manufacturing activity.
Copper demand elsewhere in the world, however, has been weaker, so, Wilkes said that for the current price trend to continue there will need to be more strength from Europe and the US as well. But at the moment those regions have been lagging with lower apparent copper consumption.
ICSGs Risopatron pointed out that while refined copper usage outside of China was down about 1 million tonnes year on year in 2020, he projects a slight recovery in 2021 to 11.2 million tonnes from 10.7 million tonnes. This, he said, assumes that in the West there could be some restocking given the marginal copper inventories on the LME and CME. But the question is whether this will be impacted by the tightness in refined copper supply.
Wilkes said that while Europes green initiative will support demand going forward, it has not done so yet. Also there continues to be some worries about European demand, especially in those countries that have returned to lockdown, he said, adding, We need to see economic recovery there in 2021 for European demand to recover sufficiently, but that is not likely until the second half, even with a stimulus package in place.
Meanwhile, while the US is seeing higher copper demand recovery than Europe, Wilkes said that, especially with the delay of a stimulus bill, it still lags China. And he noted that there continues to be some worries about consumer demand in 2021, not just in the US but globally even in China, which, while likely to remain on the forefront, has been careful with its stimulus to not create a bubble in demand.
The copper market is coming into 2021 with somewhat elevated inventories, Donskoy noted. But it is hard to say if that will be a drag on prices as demand in China will keep growing, although at a somewhat slower pace, at the same time there will be some support from mature economies.
Risopatron pointed out that copper demand has also been supported by the recent shortage of copper scrap, which was largely related to a collapse of prices and manufacturing lockdowns during the Spring, as well as the fact that scrap that is not currently going to China is being shipped to such other countries as Vietnam, Malaysia, Thailand, Cambodia and South Korea. It is possible, however, that recent higher prices will bring more scrap into the market.
But while the copper market is very bullish right now, the market could be somewhat extended, Mothersole said. With any bad news in early 2021 which is possible with a Covid-19 second wave there could be a temporary pullback in copper and other base metals, including some profit taking that could at least temporarily send prices lower.
Aluminium has also been very strong, outperforming some expectations at least in the second half of 2020 when, as Cao observed, it experienced a V-shaped recovery after it took a severe hit during the Spring when the Covid-19 pandemic lockdown measures had affected business activities in all of the major aluminium end-use sectors. Those included building and construction and the transportation sector, with aerospace being the sector that was the most severely impacted. He said that while aluminium demand was estimated to be down by about 6.0% in 2020 overall, including as much as a 12.6% decline outside of China, he believes it will recover by 4.7% in 2021.
Cao attributed the dramatic increase in not just aluminium demand, but also its fast and steep price rally, on several factors, including governmental economic stimulus policies, the recovery in the Chinese economy, abundant financial liquidity and the Covid-19 vaccine developments.
The strongest recovery, Mothersole said, has been in automotive, which in some countries has seen production rates come back up, or nearly up, to pre-pandemic levels. He said that is despite early expectations that 2020 was going to be a disastrous year for that end-use sector. In China that has been further supported by growth in EV demand at the same time as its property sector is starting to recover, Wilkes noted.
He pointed out that in Europe, while construction activity has been weak, its manufacturing sector, including the auto market, has started to recover. Meanwhile, despite the increase in Covid cases, there has been a stronger return in aluminium demand in the US, Wilkes observed, attributing that to less stop-start of manufacturing as well as a strong pick-up in auto sales, especially given increases in aluminium content. While they are still down year on year, they have been more resilient than initially thought.
Meanwhile, there were significant mine supply disruptions across the base metals complex in 2020, Mikanikrezai said, noting that, for example, for copper there was a mine supply disruption rate of 9%, mainly in Latin America, with about 60% of those disruptions related to the Covid-19 pandemic. This, Risopatron pointed out, included a 16% decline in Peruvian copper mine production, with Chilean mine production also down by about 1%. In addition to the impact of the pandemic, political factors also played a role in the disruptions, Mothersole pointed out.
But at the end of the day it seems that the reductions that many companies will see wont be as severe as was originally expected, Donskoy said. Still, he said, copper production in 2021 could be impacted, with companies going light on mine development. But projects that are already going on remain more or less on track and the recent bull market and higher copper prices will probably make a lot of companies more confident to step up their mine development efforts.
Mothersole said that copper is not alone in this as the pandemic and plunging prices during the first half of the year affected mine exploration and development expenditures throughout the base metals complex.
On the other hand, Mikanikrezai said that refined production has been more resilient for most base metals, with only lead and tin seeing declines in 2020. For example, according to ICSGs latest forecast, global refined copper output was up by 1.6% in 2020, with a similar rate of improvement forecast for 2021.
Aluminium stands out as the metal that is not currently having a supply side problem. That, Wilkes said, is because even when aluminium prices fell in early 2020, aluminium smelters did not cut their production. He said that with more aluminium production capacity coming online that is likely to add to the metals surplus, which is about 1.5 million tonnes. That could provide some headwinds for pricing in 2021, depending upon the strength in the automotive and construction sectors. I believe that the current price rally could pause in the first quarter as the market reassesses the fundamentals, Wilkes said, and that prices could fall in the second half of 2021.
How much of a decline, however, could depend upon if the market sentiment remains positive, especially with the rollout of the Covid-19 vaccine, and if global economies begin to stabilize, Cao said.
But currently everyone is largely bullish about the outlook for base metals and closing their eyes to the possibility that there could be a slight correction, Mikanikrezai said. But given that market fundamentals should improve as the pandemic gets into better control, it is likely that average prices will be higher in 2021 than they were in 2020.
One question, however, is what will happen once countries start pulling back their stimulus measures, Wilkes pointed out.
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