Base metals could be facing something of a tug of war in 2022, with the big question being how much the positive impact on demand from the green energy transition will compensate for certain other more moderating factors. This comes after what many industry observers describe as a very positive year even an exceptional year in 2021, marked by multi-year high, and even in some cases record high, prices.
But that is certainly not to say that the base metals markets did not also face some challenges last year, Andrew Cole, principal metals analyst for Fastmarkets MB, said, including some that were at least partly responsible for those high prices.
Gregory Shearer, head of metal research at JP Morgan, agreed, noting that due to a combination of supply disruptions and logistics and supply chain issues, inventories were very tight and supply struggled to catch up to what he described as very robust post-recessionary base metal demand growth.
Another contributor was soaring energy prices, which were a double-edged sword. Cole said that those prices were positive for companies that have been able to avoid them, including companies that use low-cost alternative energy, such as hydropower, to produce their metal, but that other producers have been hurt by the high energy prices, with aluminium producers dependent on fossil fuels suffering the most from the high energy costs, resulting in the idling of some smelters.
The base metals market entered 2021 on an upbeat note, with prices showing a lot of upward momentum that had carried through the year, John Mothersole, director of IHS Markits pricing and purchasing service, observed. According to Christian Georges, head of metal and mining equity research for Societe Generale, that occurred since it had become apparent that the downturn in 2020 related to the Covid-19 pandemic was different from what the market went through during the global financial crisis.
It was actually surprisingly strong, Matt Aboud, senior vice president for strategy and business development for Century Aluminum, declared, given all the uncertainty about what impact spikes in Covid cases would have. While people had expected it to be a recovery year, they thought that demand would remain below pre-pandemic levels. But they were proven wrong, he said. Even with its headwinds 2021 was a very powerful year truly a V-shaped recovery.
That was especially the case in the first half of the year, helped by monetary and fiscal stimulus spending around the globe, which resulted in high demand for most base metals, said Ryan McKay, a commodities strategist for TD Securities, who noted that even though in the second half of last year there was a little cooling of demand, base metal prices continued to stay fairly strong, and in some cases continued to go higher because of an extremely disrupted supply chain.
Copper, a flagship of the base metals complex, recorded an all-time record high price of nearly $10,500 per tonne on the London Metal Exchange in May and the other base metals experienced multi-year highs, including aluminium, which exceeded $3,000 per tonne. Mothersole noted that while they have come back down a little since mid-year, most base prices are still at 10-year highs.
While the details vary by metal, Cole said that most base metal prices have been taking two steps forward and one back for most of 2021 and that he is somewhat bullish that the general uptrends will continue into this year, albeit with a bit of volatility as certain macroeconomic and geopolitical uncertainties play out and there is also the looming question whether base metals, as well as some other commodities, are heading for another supercycle. While their forward curves started to adjust in 2021 and are looking more like they did in 2000-2018, Michael Haigh, head of commodities research and strategy for Societe Generale, said it is still a bit early to say if they are entering another supercycle. But of all the commodities, it seems that base metals would be most likely to do so, he said.
As usual, the base metals story over 2021 and into this year has been largely about China, which, Mothersole pointed out, is not surprising given that China is responsible for about 50% of consumption or production for most base metals. He noted that while the biggest impact is how the Chinese economy is performing, it has also been an export engine that has been relied on by the rest of the world to help global economies to get through the pandemic by being a reliable supply base. But recently that has been changing, Mothersole noted, with the Chinese mandates to reduce electricity use impacting a range of heavy industries, including base metals.
Shearer said that in 2021 the star performer in the base metals complex had been nickel, which had seen close to 16% year-on-year demand growth due to both the surprising strength in Chinese stainless steel production and emerging battery demand.
Geordie Wilkes, head of research for Sucden Financial, pointed out that due to some of the new battery technologies being developed, and given that the conversion process from low-grade nickel is so energy intensive, there is a shortage of the Class 1 nickel that is used in electric vehicle and energy storage batteries. He also noted that Chinese nickel ore inventories have been drawing down to the point that there is a need for additional nickel pig iron to produce some of these products. But there have been several Chinese investments in Indonesia to address that, he also pointed out.
Meanwhile, global copper demand growth was less steep last year but still a healthy number of about 8.8% according to Cole, who noted that while it is not as affected by energy shortages as some other base metals, copper is very sensitive to Chinas economy and Chinese industrial production and that construction-sector growth peaked in the first quarter of 2021 and has slowed since then.
Carlos Risopatron, director of economics and environment for the International Copper Study Group (ICSG) pointed out that in addition to its supply-demand dynamics, one reason for the high copper price peak was speculative activity and that with copper prices going so high, so fast, it actually had a somewhat moderating effect upon demand with some fabricators slowing down their use of refined copper toward the end of the year, instead using more copper scrap.
But while coppers price has eased somewhat from its highs, with some investors rotating out of copper into such other base metals as aluminium, zinc and nickel, Cole noted that copper prices had been basically oscillating sideways, refusing to go below $9,000 per tonne before they spiked to about $9,500 per tonne in mid-December on the news that, due to logistics issues, MMG was halting copper production at its Las Bambas copper mine in Peru. Mothersole pointed out that even prior to that announcement concerns about Chilean and Peruvian production, given geopolitical uncertainties in those two countries, had been a contributing factor to the recent strength in copper prices.
Overall, however, after slow growth over the past several years, Risopatron said that global copper mine production was up 2.1% in 2021. Also, according to Shearer, due to a slew of projects that were greenlit in 2017-18, there could be another 3% growth in 2022 and 5% growth in 2023.
Risopatron said that there has also been a push for additional copper foil capacity to meet its growing demand in batteries for electric vehicles. To date, most of that growth has been in China, although there are plans for new capacity to be built elsewhere as well over the next three to four years.
Despite the headwinds affecting the global automotive market, demand for aluminium rebounded by about 9% last year, according to Shearer, who said that aluminium has been the most transformational base metal on the supply side, with China starkly reversing earlier moves to increase production in the third quarter of 2021 due to its policies to limit energy consumption.
Wilkes said this came amid unprecedented struggles with electrical power there. He noted that in Yunnan province, where smelters are largely hydropowered, there had been drought conditions last year, which resulted in power rationing. Meanwhile flooding in other regions of China caused coal, and therefore electricity, prices to spike, affecting smelter profitability. With that, as well as the rationing of electricity and emission controls in China, a lot of aluminium smelter capacity was taken offline, resulting in about a 390,000 tonne aluminium deficit in 2021, Wilkes said, adding that it could grow quite significantly globally this year possibly surpassing 1 million tonnes.
That deficit is also the result of strength on the demand side, Aboud said, including pent up demand from the lockdowns in 2020, the huge influx of stimulus worldwide, consumers spending from savings and with businesses repairing their balance sheets and finding money to make capital improvements.
The push for electrification is another contributing factor, Shearer said, observing that while light-vehicle production is down year on year, automakers are prioritizing the use of the microchips that they do have available (given last years shortage) to produce battery electric (BEV) and higher end vehicles, both of which are more aluminium intensive than more run of the mill internal combustion engine (ICE) models. Shearer also noted that BEVs have about 1.5 times more aluminium, as well as about four times more copper, than ICE vehicles.
While there is some give and take, given that there are a lot of aluminium castings in engines, Aboud said that aluminium is a winning material for electric vehicles, as it is lightweight and therefore helpful to increase an electric vehicles range. Like copper, it is also used in the cables for EV charging infrastructure.
While they are gaining market traction, McKay pointed out that EVs still account for a small share of the total auto fleet and that they are therefore not a table turner yet for aluminium and other base metal demand. Nevertheless, Georges said that by the second half of 2021 all the rhetoric about the energy transition and electrification was supportive of such base metals as copper and aluminium, especially with China becoming more willing to commit to the energy transition.
Shearer said that there has already been an acceleration in the energy transition that will continue through the next decade and propel base metals demand, noting that in 2022 it will contribute to about 40% of the anticipated copper demand growth. But he said that through 2025 this green demand will just largely function as an offset to the slowing of traditional Chinese demand.
Cole said that zinc was the base metal price that struggled the most in 2021 at least until it jumped up in October when energy shortages impacted its production, given that it is the second most energy-intensive base metal to produce behind aluminium. Joao Jorge, director of market research and statistics for the International Lead and Zinc Study Group (ILZSG), partly attributed its weakness earlier in the year to slower Chinese economic growth, particularly in its construction and real estate sectors, and especially given that China accounts for more than 50% of zincs production and consumption. But he noted that in the first half that weakness was countered by increased global auto demand, albeit that was compared to the first half of 2020 when many auto plants were in lockdown.
Jorge noted that with the huge increase of secondary lead smelter production capacity coming online over the last few years, China is well supplied with lead, although it is tighter elsewhere, with the US, for example, reliant on lead imports.
Trends for 2022
In general, the trends seen for base metals last year should continue at least through early 2022, Cole said, predicting that this year will be another one of strong economic growth, which, in turn, should continue to drive base metals demand. But he said it is not clear-cut what this bullish backdrop will actually mean for prices, given that at the same time with central banks starting to taper their monetary policies, the Chinese economy starting to slow and certain geopolitical issues, the macroeconomic picture is rather mixed. We are bullish, but not super bullish that we will see higher prices given that there are risks on the horizon outside of supply-demand fundamentals that could change things, he said.
Some other industry observers, such as Mothersole, are actually predicting a price correction for the base metals complex this year, but, It isnt that we expect prices to collapse anywhere like they did during the first half of 2020, he said.
Georges said that while mining profits might decline in 2022, that is only because in 2021 they had been so exceptional: It wont be a bad year.
Shearer said it is also possible that the dynamics will vary half-by-half, given that the current low inventory position is likely to continue to be supportive during the first half. But what happens beyond that will depend upon China. We are expecting Chinese GDP growth to be only about 4.7% in 2022 and we arent expecting to see a broad-based turnaround from the tightening of Chinas real estate policies. Because of this, he said Chinese copper and aluminium demand growth is likely to only be about 1% in 2022.
The outlook also depends on supply, and McKay said that the current attractive prices and other factors, including a waning of Covid-19 issues, should on net result in greater supply with a lot of smelter capacity, particularly for aluminium, but also for copper and zinc, that was idled during the pandemic other than the capacity that has been constrained by high-energy costs coming back online. He forecasts that aluminium production capacity will increase by about 4.5% in 2022 and that copper and zinc capacity will be up by 3-3.5%, while nickel will be up about 7%.
Georges said that, near term, with the high energy costs, there could be some further idling of smelter capacity beyond such moves as have recently been seen at some European zinc smelters. But one big question for 2022 will be the tug of war between the slowing growth environment in China and the emerging energy transition, Shearer said.
Cole agreed, saying that the impact of the energy transition upon base metals is hard to quantify. He said that while at the moment the biggest impact has been on sentiment, there are some base metals particularly nickel, copper and aluminium that are already very exposed to this green revolution, especially with the support it is receiving from certain governmental policies, prompting more investments in EVs and new battery technologies.
Jorge said that lead demand could eventually be affected by the push for more EVs, but that the impact will be moderated by the fact that the replacement battery market is more important than that for new auto battery units, that EVs still use lead auxiliary batteries, and that the energy storage systems needed for intermittent sources of renewable energy, such as wind and solar power, still often need to utilize lead batteries.
Any real change relating to this green transition is still a few years down the road, Cole said, especially given that the current high inflation could slow the rate of transition because the raw materials needed to keep pace with some of the governmental targets might not be readily available due to supply chain issues.
The decarbonization push is here and it will continue, Aboud said, noting that in addition to changes in the energy mix, it could be accomplished by finding ways with a lower carbon footprint to produce raw materials. For aluminium, this includes new technologies under development such as inert-anode carbon-free electrolysis and carbon capture. He noted that Century Aluminum and certain other producers have pilot projects to enable carbon capture at aluminium smelter sites.
Overall, it is expected that there will be a better balance of supply and demand in the base metals market in 2022, barring any unexpected events. If there is any wobble in the market either because of Covid or another demand disruption that could affect speculative interest, Haigh admitted, But given that the underlying fundamentals are so robust, I dont think there will be a large downward adjustment or that prices will stay down for very long.
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