The rally in base metals prices in 2020 and the first quarter of 2021 has resulted in some market participants questioning if it represents the start of a new supercycle. While CRU believes it is too early to call a supercycle and caution is warranted, we do believe 2021 will be a year of higher commodity prices. Below, we outline some of the key market drivers for copper, nickel, zinc and lead in 2021, and assess the risks for these commodities.
Copper
The rally in copper prices in 2020 was due mainly to the recovery of Chinese copper demand which was underpinned by Chinese government stimulus and an increase in export market share for a number of copper-containing goods. In 2021, continued fiscal and monetary policy support is providing additional momentum to prices against a backdrop of multi-year low exchange stocks. Chinese demand is expected to remain strong in 2021, growing by 3.5% due to a rise in completions in the real estate sector and an increase in air conditioning, automotive, and consumer durable production. Elsewhere, North American demand is expected to recover to 2019 levels while Europe will take a little longer. Despite the lag in Europe, we are forecasting global copper demand to rise 5.2% in 2021. Copper price recovery could still be in early stages looking at previous cycles.
While the immediate threat of COVID-19-related supply disruptions has lessened, risks are still apparent as large producing countries, Peru and Chile, are starting to approach the winter months. To compound matters, Chile and Peru could face political turbulence associated with the forthcoming elections scheduled for April/December and April/June, respectively. In addition, several labour contract negotiations are due to be settled, including Escondida in August, El Teniente in October and Sierra Gorda in December. As a result, we expect mine disruptions to be above the long-term average this year.
Despite the possibility of a large number of disruptions, we expect several Tier 1 projects (>100,000t/y) to be commissioned this year, including Spence Sulphides, Mina-Justa, Kamoa, and Qulong. Some of the smaller but significant Tier 2 (50–100,000t) projects that will be commissioned include the Toromocho Expansion, Timok, and the Zone 5 Starter. We also expect a lift in output from existing operations, including Grasberg (+244kt), Cobre Panama (+115kt), and Cerro Verde (+115kt). However, production at a few major operations, such as Morenci, Las Cruces, Escondida, Chuquicamata, Sepon, and Safford, is expected to fall this year which, consequently, will cap mine supply growth at 2.9%, meaning mine output will be limited to 21.1Mt.
With blister production from concentrates expected to rebound 3.3% year-on-year in 2021, partly due to smelter outages in 2020, the copper concentrate market is forecast to remain tight over the year. However, we do expect a two-tiered market, with the first half of the year remaining in deficit and the second half in surplus. Full year, the market will be in a minor deficit of 25,000t. This has already been factored into annual benchmark treatment charge terms which were settled for 2021 in December last year at $59.50/5.95¢, down from $62.00/6.20¢ in 2020 and $80.80/8.08¢ in 2019. There is a risk though that over 2021 the market will get tighter as the aforementioned supply disruptions reduce mine output from forecast levels and push the concentrate market into a larger deficit, resulting in even lower spot terms. In February, we assessed the miner-to-trader and trader-to-smelter spot markets at $27/2.7¢ and $38/3.8¢ respectively.
While lower TCs are a worry for smelters, the volume of complex concentrates entering the market is also an added challenge. Collahuasi is the main concern, as the mine is expected to produce concentrates with elevated arsenic over the next few months. There is also the ongoing concern of Grasberg’s high fluorine levels. Some of this risk has been managed by traders moving material to Taiwan for blending. With such high levels of complex material in the market, Chinese smelters may turn to increased scrap usage this year as China has now officially implemented its new non-ferrous scrap import regulations (in November 2020). The new scrap policy will allow traders to start moving material into the country again as many held off over the fear of having cargos stranded due to unclear rules surrounding certain types of scrap. The unclear rule status resulted in Chinese imports of copper scrap falling approximately 40% year-on-year in 2020 to 770,000t on a copper-contained basis.
So, what is the outlook for prices? LME 3M prices hit 9.5-year highs of ~$9,500/t in February, driven by expectations of a global economic recovery, the green energy story and multi-year low exchange inventories. This thematic is expected to continue to mid-year at which point the introduction of new mine supply and declining momentum from the vaccine roll-out will see prices ease back. As a result, we have set our 2021 LME 3M copper price average at $8,835/t, an increase of 43% on the 2020 average.
This forecast is not without risk. The downside to the price forecast includes a selloff in equities or risk assets, further COVID-19 waves, a faster-than-expected supply response from existing operations or scrap and the eventual unwinding of federal stimulus. Upsides to the price forecast include further supply disruptions, prolonged labour negotiations and social unrest in Chile and Peru, extended U.S. dollar weakness, and a faster-than-anticipated rate of EV transition and renewables development.
Nickel
After falling 2.7% in 2020, global nickel consumption in 2021 is expected to rebound sharply, growing by 10.3% to 2.6Mt. The robust recovery is partly the result of a low base effect in 2020, but we should also see strong electric vehicle sales, driving higher demand for batteries, and robust stainless-steel output this year. China and Indonesia will remain the key countries behind the global increase in stainless steel output in 2021 and we expect production to rise 9.2% and 24.6% respectively.
While stainless steel will remain the primary driver of increased nickel demand in 2021, the rising importance of battery demand will continue. This year, we expect nickel demand in batteries to rise by 21% to 239,000t. While this growth is significant, batteries are only expected to make up 9.1% of total nickel demand. However, this is up from 3.2% in 2015 and 5.9% in 2018.
The importance of Indonesia as a producer of nickel will continue to increase in 2021. We have upgraded our forecast for Indonesian NPI production as the incentive to build new capacity has grown with the recent rise in NPI prices. Growth in Indonesian NPI output this year will be supported by the commissioning of new lines at Weda Bay and at Virtue Dragon’s site in Konawe. The rise in Indonesian NPI (+293kt year-on-year) will more than offset the fall in Chinese NPI production (-167kt year-on-year) due to the Indonesian ore ban. There is further downside risk to Chinese NPI production as President Duterte has reportedly ordered additional Philippine mines to stop production, which could impact ore exports to China.
It is not only NPI production that will increase in Indonesia in 2021. This year is expected to see significant HPAL capacity added in Indonesia, including the PT Lydend project and the Huayue Nickel and Cobalt project. However, Chinese battery producer, GEM, has delayed the start of its PT QMB project until 2022. These three projects are expected to produce 160,000t of MHP by 2025.
Overall, we expect global nickel supply to rise by 7.4% this year. This will be outpaced by nickel consumption, meaning the market will see its surplus reduced to 74,000t. Despite the smaller surplus, we believe the LME 3M nickel price will ease from current levels as industrial activity slows during H2 2021 and positive investor sentiment fades. As a result, we forecast the LME 3M nickel price to average $17,025/t in 2021, an increase of 23% over the 2020 average.
Zinc
Following a year where the global pandemic brought severe disruption to zinc mine supply and refined demand, 2020’s refined surplus (+507,000t) and concentrate deficit (-191,000t) are expected to moderate this year.
In 2020, the strength of the Chinese recovery helped limit global demand losses. This year, we expect the effects of targeted Chinese infrastructure stimulus to continue to support the recovery. China will drive the global zinc demand upturn, with growth of 3.0% year-on-year due to strong demand from the galvanised sheet sector which in turn will be driven by fixed asset investment in real estate and infrastructure. Ex-China demand will partially recover, rising by 7.9% in 2021, led by U.S. infrastructure spending and a recovering European automotive market. As a result, global demand is expected to rise by 5.3% year-on-year to 13.8Mt.
Following last year’s 3.9% decline in global mine supply, we expect growth to return in 2021 (+5.6%) as operations swing back to full production following reductions due to COVID-19. Mine supply will also be boosted by new mines including Zhairem, Asmara, Dairi, and Aripuanã, and the ongoing expansions at Hindustan Zinc and Neves-Corvo (Lundin). Chinese mine growth will be limited despite coming from a low base. However, there are threats to the outlook. A second wave of COVID-19 cannot be ruled out in two major producing nations of Peru and Bolivia where they have not had much success in limiting COVID-19 cases. Peru also faces further supply risks as the country has its general elections in April, which could bring further protests and disruptions to zinc supply at operations that are already struggling. One upside for miners in 2021 is that at our current price forecast, we expect very little of the industry to be loss making.
The supply risk in important producing countries will weigh heavily on the settlement of treatment charges this year. At the time of writing, benchmark terms are expected to settle between $180–200/t, a significant drop from the 2020 level of $299.75, which plays well for the marginal miners who are looking to restart.
CRU expects the LME zinc price to be supported by concentrate market tightness this year. However, the rebound in global refined zinc demand is expected to fade as the year progresses which, coupled with the surplus of metal in stocks, will place downward pressure on LME prices. As a result, the LME cash zinc price is expected to moderate over the year, to an average of $2,617/t, an increase of 10% year-on-year.
Lead
Global lead demand fell in 2020 (-4.8% year-on-year) as world light vehicle (LV) sales slumped, most notably in Western Europe (-23.9% year-on-year) and the U.S. (-14.8% year-on-year). However, vaccine rollouts and aggressive U.S. fiscal stimulus are expected to bode well for lead demand in 2021. This year lead consumption will be boosted by strong replacement battery demand and stellar LV production growth (+16.3% year-on-year). While there is concern in the market about full BEVs switching from lead-based batteries to lithium-based batteries for start-up/lighting/ignition functions, we believe this will have a limited effect this year, and indeed over the next five years, as it is only a few producers at this stage which have started to switch.
A recovery in refined lead production is expected in 2021. The aforementioned strength of the replacement automotive battery market is expected to ensure more than sufficient scrap feed volumes for secondary smelters. Late winter cold snaps in the U.S. and Europe are likely to provide additional feed for already well-fed secondary smelters but this will put further downward pressure on scrap prices.
Primary smelter production is expected to recover in 2021 (+3.1%), but not to the same extent as secondary lead production. A tight concentrate market will hold back some refined production while emission limits at Nyrstar’s Port Pirie is also forecast to cap output. The market will see some major mine closures this year – Pomorzany, Madero, Colquijirca, as well as lower output from Mount Isa – which will limit lead mine production growth. So, while lead output will rise in 2021 by 2.2%, we do not expect it to reach 2019 levels until 2023.
The lack of concentrate growth and subsequent tight market is expected to result in a drop in lead benchmark treatment charges. For the dominant “high-silver” lead concentrates custom market, we think that lead TCs will fall from $182.50/t in 2020 to $145/t in 2021, still a step up from 2019’s $98/t. We suspect the fall in lead TCs could be partly offset by higher silver RCs, rising from $1.50/oz in 2020 to $1.60/oz in 2021 ($0.60/oz in 2019) as smelters look to benefit from the rise in silver prices.
While lead is still lagging behind other LME metal prices due to a lack of investor enthusiasm, broader macro drivers including the depreciation of the U.S. dollar will provide support in 2021. Coupled with a balanced global refined lead market and low stock levels (1.6 weeks of consumption), we expect LME lead prices to average $2,030/t in 2021, an increase of 10.5% year-on-year.
