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The oil price is caught between a short-term recovery and the medium-term prospect of peak oil, as countries ramp up programs to decarbonize by switching power generation sources and banning internal combustion engines (ICE).

The oil price has been seesawing between vaccine optimism and pandemic pessimism. Yet, it has managed a gradual recovery from its lows last year to around $50 a barrel now.

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Oil price recovers … but outlook remains muted

However, the oil price is nowhere near where most OPEC+ members would like it to be. It’s also not where shale producers need it to be to sustain capital raising for a return to growth.

However, the oil price could arguably have been a lot less. The price owes its current position to stoic management by OPEC+’s leading producers, Saudi Arabia and Russia.

Consumption still hasn’t recovered to a pre-pandemic level. Furthermore, it doesn’t have any prospect of reaching the levels projected for 2021 global consumption this time last year.

Demand destruction

Demand destruction has come from three main areas, the Financial Times notes, none of which are likely to turn around anytime soon.

The first factor is jet fuel. Air travel is severely depressed and is unlikely to fully recover for several years. Current consumption is some 2.5 million barrels per day below pre-pandemic levels.

Meanwhile, the second factor is gasoline and diesel consumption, which will likely recover more quickly. Even so, it will likely not see 2019 levels this year.

The final hit is from a wider loss of industrial activity and lower levels of goods shipped by sea.

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Global copper mine production during the first nine months of the year fell 1%, the International Copper Study Group (ICSG) reported.

Furthermore, the global copper market posted an apparent deficit of 387,000 metric tons during the period.

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Global copper mine production

Global copper mine production slipped by 1% during the first nine months of 2020. On the other hand, the fall is well below the 3.5% drop recorded during the months of April and May, when the first wave of coronavirus infections hit many parts of the world.

Meanwhile, copper concentrate production fell 0.8%, while solvent extraction-electrowinning dropped by 1.5%.

No. 2 copper producer Peru saw its output fall 16.5% during the first nine months of the year. Although the reduction dropped to 2% in July, ICSG noted, Peru’s copper mine production in August and September fell 12.5% year over year.

Top copper producer Chile, meanwhile, saw its copper production rise in the first half of the year by 2.5%.

Like Peru, however, Chile’s production slipped in Q3. Chile’s Q3 copper mine production fell by 3.7%, the ICSG reported.

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There has been quite a bit of analyst chatter about the likely impact of China’s return to the steel scrap market next year.

In 2019, the authorities essentially banned steel scrap imports. The move came, in part, because many of the grades were classified as waste. However, of late the rumor is China will be moving to reclassify ferrous scrap as a recyclable resource and could lift the import ban (probably in Q1 2021).

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Steel scrap imports plunge

According to Platts, China has 184 million tons of EAF steelmaking capacity at the end of 2020. Furthermore, the country will likely have 197 million tons by end of 2021.

The totals are up from 175 million ton at the end of 2019, when scrap imports had plunged to just 180,000 tons due to the ban.

Domestic steel scrap production has been on the rise, generating some 240 million tons in 2019. As such, the 2014-18 average annual imports figure can be seen as minuscule by comparison.

But while they may be small, they are not insignificant.

Normally, imports rise and fall relative to the premium arbitrage of domestic prices over world prices. Currently, domestic steel scrap prices in China are said to be about $60/mt or Yuan 400/mt over Southeast Asian seaborne scrap prices on like-for-like grades (when freight and taxes are included).

Should imports be relaxed, there is, therefore, the potential to suck in considerable imports.

Platts suggests this would not top the record 13.7 million tons imported in 2009. Some, however, disagree, saying it could reach 20 million tons.

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Not so long ago on a fall night here in Chicago, I had the opportunity to meet up with a couple of folks from a steel producer. 

What they told me then sounded a little scary — they suggested the “A” word — but not nearly as scary as current market conditions suggest. 

In metals markets, the “A” word does not contain three letters. 

It does, however, connote something far worse for many metal buying organizations: allocation!

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Dreaded allocation

Allocation markets cause sleepless nights for procurement professionals because, without material, lines get shut down and businesses fail to operate profitably. 

Undoubtedly, the dreaded “A” word is upon us, particularly for steel markets.

Back in May of this year, toward the end of the last COVID-19 “surge,” MetalMiner contemplated what could happen to steel prices once demand came back onstream.

MetalMiner saw two scenarios: a gradual increase in demand followed by panic buying or a rather dramatic increase in demand led by the automotive industry, combined with slow mill restarts and historically low starting inventory levels held by service centers. 

We assumed the first scenario, but obviously the second ensued.

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The Global Precious Monthly Metals Index (MMI) gained 1.5% for this month’s index value, as the gold price has lost some of its gains from the summer.

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Gold price gains

MetalMiner’s Stuart Burns recently checked in on the gold price and where it might be expected to go in 2021.

As precious metals watchers know, the gold price has enjoyed a sharp rise this year amid the global pandemic.

“The bulls are predicting a resurgence in the price to U.S. $2,300 per troy ounce in 2021,” Burns wrote.

“Goldman Sachs stated last month they had a target of $2,300, as recovery from the coronavirus-related recession fuels higher inflation next year. Goldman’s economics team sees inflation rising to 3% next year before weakening through year-end. Further fuel could be added from a recovery in demand from India and China.”

However, in the short term, the gold price has retraced since its August peak.

“Investors rotated out of safe havens into riskier assets on hopes of a vaccine-induced economic boom next year,” Burns explained.

“The story here is more conflicting. Yes, vaccines appear to be coming faster than London buses in rush hour.

“However, so are infection rates and hospitalizations.”

So, as with most commodities and commercial sectors, much of what happens next depends on the the world’s ability to get the pandemic under control and begin to return to pre-pandemic routines of life.

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The gold price has been on the rise during the pandemic this year. As infections rise, vaccines loom on the horizon and economies gradually recover, what do we expect from the gold price in 2021?

Gold price bulls

The bulls are predicting a resurgence in the price to U.S. $2,300 per troy ounce in 2021.

Goldman Sachs stated last month they had a target of $2,300, as recovery from the the coronavirus-related recession fuels higher inflation next year. Goldman’s economics team sees inflation rising to 3% next year before weakening through year-end. Further fuel could be added from a recovery in demand from India and China.

Punchy, you may think.

The gold price rose strongly in the first half of 2020, in large part due to the fall in both nominal and real yields. An increase in safe-haven investment demand in the wake of the virus-induced economic slump also contributed, Capital Economics wrote recently. The research house explained the the price rise has been strong since the start of 2019, riding an 18-month surge in demand for ETF holdings as a safe-haven investment. That is a process that gathered pace in the face of the pandemic.

Gold price retraces after August peak

However, the gold price has dipped from its August peak. Investors rotated out of safe havens into riskier assets on hopes of a vaccine-induced economic boom next year.

The story here is more conflicting. Yes, vaccines appear to be coming faster than London buses in rush hour.

However, so are infection rates and hospitalizations.

It will be a dark winter, as actual vaccination rates fail to live up to expectations and people continue to die. However, markets generally look forward, not at the present. The expectation remains that, sooner or later, markets will recover as vaccinated immunity spreads through the population.

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China is going through a purple patch at the moment, particularly the Chinese aluminum sector.

An early and strong rebound from Q1 lockdowns and significant stimulus investment that has made its way into property and infrastructure activity have boosted demand for all the base metals.

However, aluminum has arguably seen the biggest benefit.

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Chinese aluminum sector sees rising bauxite, alumina imports

A recent post by ING notes China’s strong imports in aluminum-related raw materials — notably bauxite and alumina — continued in the second half.

Bauxite imports in the first 10 months grew by 14% year over year to around 96 million metric tons. Total alumina imports, meanwhile, rose by 205% to 3.1 million tons.

As we reported last month, primary metal imports, while easing now, have been a surprise feature this summer. Total imports in the first 10 months hitting 878 ktons, or 14 times higher than the same period last year, ING reports.

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China and India find themselves in some sort of a mini-race in the crude refining business.

(As readers of our Annual Outlook know, the oil sector is one of three key macroeconomic pillars we consider in our analysis of commodities markets, in addition to the Chinese economy and the strength of the U.S. dollar).

China races ahead in crude refining

China, though, is paces ahead of its neighbor. If all goes to plan, China could soon dethrone the present No. 1 refiner, the United States.

Bloomberg quoted the International Energy Agency (IEA), which said that perhaps by next year, China would dethrone the U.S. as the top refining country in the world.

This will be no small feat.

China may become No. 1 following the closure of some refineries in the U.S.

Steve Sawyer, director of refining at energy industry consultancy Facts Global Energy, told Bloomberg in an interview that, in the coming years, China would be putting out an additional million barrels a day, helping it overtake the U.S.

India aims to build crude refining capacity

While China goes about the crude refining business, its neighbor India has also thrown its hat in the ring.

For the last couple of years, India has made no bones of building its domestic refining capacity. The country has added some well-known international petroleum companies to its client list.

India planned to double its current capacity in the next 10 years. However, Prime Minister Narendra Modi wants things done faster.

At present, India’s refining capacity stands at 250 million tons, or a little more than 5 million barrels per day, based on a conversion factor of 7.33 barrels per metric ton of oil. Under an earlier plan, India sought to hike this to 450 million to 500 million tons over the next 10 years.

Now, Modi wants to do it even faster, accomplishing it within five years.

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As the World Bureau of Metal Statistics (WBMS) will tell you, the global aluminum market reached a surplus of 1,603 kt in the January to September 2020 period.

That tripled the surplus of 480 kt recorded for the whole of 2019.

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Global aluminum market sees rising production

Production continued to rise in China. In addition, production made a strong comeback in North America, where it rose 4.3% year over year, according to Capital Economics, largely due to the recovery of Alcoa’s Becancour smelter in Canada.

Chinese output grew 3.8% to nearly 31 million tons in the January to October period. Even so, demand still outstripped supply. The country imported some 766 kt of primary metal, according to Reuters.

Despite Chinese demand — or maybe because of it — an estimated 3.2-million-ton global surplus will build this year, according to CRU estimates. Some 2.9 million tons of that tonnage will occur outside of China.

Aluminum stocks and demand

Yet if ever there was an example of how exchange stocks are no indication of demand, LME inventory levels actually fell this year (down by 53 kt so far).

Surplus production has a way of disappearing off the radar in the aluminum market. The stock and finance trade soaks up excess production and profitably stores it away on the back of a strong LME forward price curve.

The portion that is visible via the LME’s off-warrant reporting structure doubled from 730 kt in February to 1.56 million tons by September. That figured has continued to climb since.

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The World Platinum Investment Council (WPIC) released a report this month with a bullish view of the platinum market in 2021.

The WPIC is bullish on the basis of stronger investment demand and restricted production in South Africa.

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Platinum in deficit

The WPIC is predicting a record deficit of 1.2 million ounces in 2020. The projected deficit would mark a sharp uptick up from a deficit of 100,000 ounces in 2019.

The report states supply in 2020 fell by 18% due to virus-induced lockdowns. Meanwhile, demand fell only 5% as automakers managed to maintain output, resulting in a deficit of -1,202 Koz.

Next year, the council is expecting demand growth of 2%. That growth, it expects, will come on the back of stronger consumer and industrial demand as consumers return to less cautious ways and increase spending on jewelry and cars.

Automotive will see support not just from increased car sales but also greater per-vehicle PGM use as implementation of new, tighter Euro 6 emission standards in Europe come into effect.

This is expected to result in supply increasing by 17% and demand rising by 2%, resulting in a lower deficit of -224 Koz.

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