Metals prices have made a strong start to the “year of the bull”, with positive macro sentiment continuing to lift most metals prices to highs not seen since the early 2010s. There are plenty of positive stories, with low visible inventory for many, and tight raw materials supply, especially in copper and zinc, which will continue to constrain smelter production from responding to high margin incentives in the short term.
While the demand recovery for metals since 2H 2020 has generally outpaced the supply recovery globally, we are looking for a reversal of that story through 2021. Given the current high prices of most metals, which have clearly been inflated by speculative capital flows since November 2020, that leads us to expect metals prices to end the year lower than current levels across the board. While we agree with consensus expectations in long-term demand growth from electric vehicles and other environmental trends, these remain very long-term stories, and we do not believe that this year marks the start of a new “super cycle”.
Metal consumption in China
In fact, when we take a deeper look at the data, the majority of metal markets are not in such extreme tightness as first appears. There was much end-user restocking of metals in China through 2020 amid improving order books, easy credit availability, and steadily rising prices. Additionally, market expectations of strong ex-China demand as economies recover have already been felt by most consumers of metal in China. The global restocking cycle has been the key driver of Chinese metals consumption since 2H 2020 as further evidenced by the ongoing tightness in container shipping markets. While order books remain strong today according to our PMI data, we ultimately expect Chinese manufacturers to catch up to this order backlog, with orders then fading later in 2H 2021.
In terms of China’s domestic metals consumption, we also expect this to weaken through the year as China moves to tighten macro policy to counter the global economic recovery and prevent overheating in the economy. This is also the first year of the 14th Five-Year Plan in China, which has much less in the way of support for infrastructure and housing development than was seen in the 13th Five-Year Plan, with the pace of investment in high speed rail buildout dropping by half, and the shanty house reconstruction programme, which in 2016-2018 accounted for 20% of housing construction, finally coming to an end. Nonetheless, it’s not all bad news for metals consumption, as China’s push to upgrade livelihoods and clean up its environment will still be very supportive to the consumption of many metals, especially copper over the medium and longer term.
While we expect Chinese metals consumption to weaken through the year, supply on the other hand is likely to rise strongly, especially given the current high prices and margin incentives for producers. Supply of almost every metal was hit by severe COVID-19-related mining disruptions in 2019, and while some countries continue to be hampered by this in the near term, ultimately these issues should ease through the year as vaccine rollouts become more widespread.
Specific metal performance
Copper and zinc were two of the metals which saw the biggest mine supply falls in 2020, with copper losing 450kt and zinc 600kt, and both have extremely low TC/RCs currently. Copper mine supply on paper could be over 1M tonnes this year, with a number of growth projects accelerating, but allowing for ongoing disruptions means the net mine supply growth is likely to be around half that level. Zinc mine supply, meanwhile, is only set to recover around 500k tonnes this year, leaving it still below 2019 levels, and we expect zinc to remain relatively tighter through the year.
For aluminium and nickel, supply in 2020 was relatively less disrupted, and thus for 2021 we see few bottlenecks to a stronger supply ramp in response to high prices. For aluminium, there is no lack of bauxite or alumina supply in China, and thus new smelters should be able to ramp up aluminium supply, especially with new hydro power facilities coming online in Yunnan to boost power availability to new smelter capacity. In nickel, meanwhile, NPI supply in Indonesia is set to soar from 595k tonnes last year to 885k tonnes this year, in addition to new facilities to start processing nickel ores into nickel matte and ultimately battery grade material. Overall, we see an abundance of nickel units being available through the year, and nickel looks to have considerable downside to the elevated prices seen in February 2021.
One other key aspect of supply growth this year for many metals, which we believe is being overlooked by many in the markets, is in scrap. Scrap metal supply, especially for copper, was sharply lower in 2019 due to a combination of China’s import bans, low scrap prices, and COVID-19 lockdowns, which hampered scrap generation and collection globally. With metal prices now at multiyear highs, we’d expect scrap generation to surge, especially once the northern hemisphere comes out of winter and lockdowns allowing scrap collection rates to accelerate.
China’s new scrap import classifications, which freely allow the import of high-quality processed scrap, came into force in November 2020 for copper and aluminium, and January 2021 for steel scrap. Since then, scrap volumes have been flowing reasonably smoothly into the country, while China’s reappearance as a scrap importer has lifted ex-China scrap prices to arbitrage with higher domestic onshore scrap prices. We think in particular the market is underestimating just how much China’s scrap imports are going to surge this year, and the net impact on overall market balances globally from a sharp increase in scrap generation and collection rates.
The counterbalance
Overall, our more pessimistic views on the metals outlook for 2021 is somewhat counter consensus. While many analysts are looking for surging demand and lacklustre supply, we are looking for the opposite, especially in China where demand was already so strong over 2H 2020. Nonetheless, in the weeks ahead apparent consumption growth rates will look strong given the low base effect from 1H 2020 when much of the world saw economies paused in lockdown. Thus, the sentiment towards demand and hence metals prices may continue to remain positive until the middle of the year.
Additionally, the surge in speculative capital into metals markets since late 2020 may also continue to support prices in the near term, and while our expectations are for fundamentals to weaken in 2H 2021, we expect near-term metal price performance to continue to be driven more by macro flows. Whether this global macro sentiment remains positive amid ongoing stimulus and broader global economic recovery, or goes into reverse on tightening concerns in China, or a sustained rally in the U.S. dollar, is likely to have more bearing on metals prices over 1H 2020 than underlying market fundamentals.
