Metal prices bottomed out earlier this year and ever since we are seeing rising prices. However, was that the ultimate bottom after a five years of a bear market? Are metal prices set to continue running higher in 2017?
These are questions we can’t answer, but they will be answered moving forward. Although industrial metals entered a bull market this year, we have yet to see how long this rising market will last. In Q3 we already witnessed some weaknesses with many base metals struggling to build on this year’s gains.
We see three critical factors to watch as we move in 2017. These factors will determine the sustainability of this year’s bull market:
Some production capacity was closed this year to fight low prices and the market now seems more balanced than last year. These supply cuts helped push metal prices higher, but the problem is producers might now have enough incentives to restart production. A good example is the zinc market. Zinc prices rose sharply this year thanks to supply cuts, but now markets wonder if Glencore and China’s zinc miners will start upping their production to reap the rewards of higher prices.
The closure of production lines leads to job losses and political repercussions. In the case of steel, we’ve heard China is making big promises (again) this year to cut capacity but, so far, the country is running short of its targets. For this rally to be sustainable, we’ll need to see more supply cuts and definitely no capacity restarted.
Chinese Stimulus Measures
China unleashed a renewed government stimulus in the form of credit expansion and infrastructure building in December, which has — at least momentarily — improved the demand side of the equation for commodities and particularly for industrial metals.
China’s stock market rallied to its highest levels in almost a year, signaling that investors are more optimistic about China’s growth prospects. Some might argue that this rally is just fueled by government intervention and, therefore, it’s just speculative. Whether this is just speculation or not, a new round of stimulus measures would be bullish for metal prices in 2017.
On the other hand, if the efforts of central planners in Beijing fail to spur growth, that would have a depressing effect on metal prices in 2017 and we would see that reflected in China’s stock market performance and economic numbers.
The US Dollar
Base metals as commodities move in the opposite direction of the dollar. In the spring of 2011, the U.S. dollar started a new bull market, which coincided with the peak of commodity prices. Ever since, the dollar has trended up and commodities down. However, this year, the dollar weakened contributing to higher metal prices.
The Federal Reserve showed intentions at the end of last year to raise interest rates four times in 2016 but Fed officials have left interest rates unchanged so far this year. This had a depressing effect on the dollar. However, it is possible for the dollar to rise in 2017, as the Fed seems more willing, now, to hike rates. Higher interest rates would boost the dollar as it makes the currency more attractive to yield-seeking investors.