Industrial metals have had a good few months in Q3, in part due to a China recovery.
It’s not a bull market, of course — we have called it a sideways market.
However, it has been a pretty positive sideways market. Copper is up from $2.60/lb at the end of the European lockdowns to $3.20/lb today. Aluminum is up from $0.70/lb to approaching $0.90/lb.
The MetalMiner 2021 Annual Outlook consolidates our 12-month view and provides buying organizations with a complete understanding of the fundamental factors driving prices and a detailed forecast that can be used when sourcing metals for 2021 — including expected average prices, support and resistance levels.
Much of that rise has ridden on the back of a resurgent Chinese economic recovery driving such strong domestic demand that the country has switched to becoming a net importer on key metals this year.
Ongoing policy stimulus in China has made its way into industrial and construction investment. That should continue to boost investment and industrial output in the coming months.
Retail sales, while slow to recover in the early summer, are now back to pre-pandemic levels. Auto sales have benefited from pent-up demand earlier in the year supporting the retail sales numbers.
How long can China’s recovery continue?
Industrial metals buyers may be asking how long can this continue. Will prices continue to rise?
There seems little end in sight as China’s local governments move to spend the proceeds of infrastructure-backed bonds. The prospect of not one but possibly many vaccines raises optimism in the rest of the world.
But recent analysis by Capital Economics urges a note of caution.
The research house raises two areas of concern. Firstly, the team expects fiscal support to be withdrawn. As a result, that will weigh on infrastructure investment.
This, in turn, will drag on metals demand and prices, particularly for copper. Secondly, the firm expects stricter rules on borrowing by property developers. Stricter rules will weigh further on growth in new home starts and property investment.
Neither of these trends is likely to hit metal demand adversely in the near term. However, as we move through spring 2021, the strength of the current rebound is likely to wane. Prices in the rest of the world relative to China could begin to normalize.
The SHFE has been at near-record premiums to the LME based largely on the recovery in China relative to the rest of the world. However, that disconnect will not last indefinitely.
Vaccines will help industrial recovery in the rest of the world return to pre-pandemic levels later next year, first in the U.S. and then later in Europe. China’s Five Year Plan calls for greater self-reliance on domestic metal supply. While China will focus on ensuring new investment has as low an environmental impact as possible, investment in domestic Chinese metals production is likely to be encouraged.
As such, import demand for refined metals should fall, further undermining price support later in the year. Despite current strength probably carrying through into 2021 by the end of next year, prices may actually be back to or even lower than current levels.
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