As we head towards the end of what has been a rather dull year for commodities, anticipation among many market participants is building around a potentially bullish seasonal trade into year-end, given that such a seasonal trade has tended to be a favourable one for a number of years. Despite sentiment having been pessimistic towards demand in the West in particular this year, metals prices have failed to break down in recent months even with ongoing strength in the US dollar and treasury yields. If prices have now found a floor, and the Western world rate hike cycle is coming to an end, the key question is – what fundamental driver could help them rise into the new year?
From a macro standpoint, if treasury yields and the US dollar can start to ease back, this would provide a major boost to sentiment in the metals markets. US economic growth numbers remain solid, however even fundamental metals consumption has eased since the summer months, with physical premiums for many metals coming under pressure and visible inventory starting to build. European demand has been suffering all year, with lower energy prices failing to reignite much industrial activity, a trend which doesn’t look like it will be reversing any time soon.
Nonetheless, inventory across most major metals remains quite lean after over a year of end-user destocking. A “goldilocks” view around Western demand avoiding a recession (even as rates start to ease), doesn’t seem a particularly strong likelihood right now. Any reasonable improvement in end-user demand, combined with a cheaper cost of money next year, could still lead to a scramble to restock metals among industrial users and spur prices to rise.
India leading the way
The one standout bright spot for metals demand this year has been India. The Indian economy continues to maintain its strong momentum, which has been building since its COVID recovery. While the country still only represents around 5% of most metals’ global consumption today, it is becoming a tailwind to global metals demand which remains underappreciated.
The Indian government has been aggressively raising infrastructure spending and successfully executing plans over the past two years. The National Infrastructure Pipeline has already outlined US$1.4T of investments in 7,400 key projects (rail, roads, airports, etc.) over the next five years, in addition to plans already underway to build affordable housing alongside the growth of the private housing market.
Demographically, India today looks very similar to where China was in 2000, with a looming wave of 20-year-olds, which gives rise to the same demographic dividend that helped drive China through the 2000s as it looked to create 20M new jobs a year.
Metallurgical coal and copper are the two commodities which stand to benefit the most given India’s lack of reserves, while thermal coal could also potentially benefit if the country looks to cleaner imports over poorer quality domestic supply.
China’s green energy revolution in full swing
While India is growing quickly, its metals consumption remains dwarfed by China, which is around 10 times its size for most commodity markets. China this year has disappointed many commentators who’ve continually been calling for old fashioned stimulus. Nonetheless, the economy continues to muddle through even with a depressed housing market, mainly due to the green energy revolution, which is already in full swing in the county.
Installation rates for renewable energy have accelerated sharply this year. Between 2017-2022, China nearly doubled wind generation capacity from 170GW to 320GW, and more than doubled solar, from under 100GW to 220GW. Installation rates have surged this year with over 300GW each of wind and solar projects under construction and to be delivered over the next three years. As a result, China is running well ahead of hitting its goal of 1,200GW renewable energy capacity by 2030, and will likely reach this in 2026.
The green energy buildout, together with the continued growth in electric vehicle (EV) penetration and associated infrastructure, has been the key supportive factor for the consumption of many metals. Solar will consume over 4Mt of aluminium and 300Kt of zinc this year, for example, while 2Mt of copper is being used across the renewable installation space. Whether this can accelerate even faster next year, however, looks to be a challenge given execution is now so far ahead of previous plans. A key question into the next five-year planning period will be whether Xi “doubles down” on the green energy story and pushes the annual investment levels even higher into 2030, or whether the annual pace of these investments starts to plateau.
Outside of the green energy space, the broader economic recovery in China continues to be somewhat lacklustre, with consumer spending failing to accelerate markedly given a lack of confidence in the employment and housing markets. An additional drag on the economy is also the lack of appetite for investment capex by the private sector and a broader lack of credit demand, with household savings continuing to build.
The Chinese RMB has also been persistently weak, which remains a sign of a lack of confidence in the onshore growth outlook. A strengthening RMB would be a key early sign of improving confidence and likely provide an early boost to metals prices.
Aluminium and zinc are best placed into the new year, while nickel could be a surprise upside
Base metals prices have continued to trade in a narrow range despite rising macro pressures through September and October. With the US$ index having peaked in mid-October, and Chinese stimulus support measures appearing to be enough to ease concerns towards Chinese demand, markets may start to see more optimism priced in into the new year.
Aluminium and zinc prices have done well on the back of improving Chinese demand, imports, and renewed supply disruptions onshore. These two metals should see further support into the new year as supply in China sees further disruption as hydropower goes into its off season, resulting in renewed smelter output cuts in the southwestern provinces where many aluminium and zinc smelters are based.
Aluminium inventory levels, both on and offshore, remain relatively low even after the peak production season. Chinese aluminium product exports are already running below 20% this year and should decline more sharply in the coming months, helping to tighten global markets into 2024 despite ongoing demand weakness in Europe and the US.
Copper prices have underperformed aluminium and zinc recently, but considering the ongoing strength in the US dollar and deteriorating fundamentals evidenced in lower physical premiums and rising visible inventory outside of China, prices have held up relatively well. The copper market continues to be supported by the longer-term bullish consensus view, which seemingly attracts buyers every time prices dip below US$8,000/t.
Copper mine supply has done well this year, though spot TCs have recently dropped as the market enters annual negotiating season. With a number of miners recently reducing output guidance for next year, it looks unlikely that the current market surplus will expand. Prices may also be supported by increased Chinese buying interest again, as the market in China appears to be tightening with stronger physical premiums and low inventory, despite stronger local smelter and scrap output.
Nickel has been the major underperformer of the core base metals this year, as the rising tide of non class-one nickel supply from Indonesia has finally pushed all nickel markets into oversupply, with weakness spreading from nickel sulphate markets into class-one especially.
Class-one nickel prices have been trading at two and a half year lows, (around US$17K) recently, but the metal is becoming oversold. As Indonesia’s clampdown on illegal mining activity in the country is getting more attention and becoming increasingly disruptive towards NPI output, markets may start to factor in some degree of market tightening, albeit temporary.
While the Indonesian situation looks supportive to prices, the Chinese domestic nickel markets have weakened again in the weeks following the October holiday, with stainless, NPI, nickel ore, and sulphate prices onshore all falling between 5-10% over the last month.
Fundamentally, plenty of nickel units should remain globally next year and beyond, even if Indonesia is successful in eliminating the 20%+ of mine output from illegal mines (policies around new mining permits for next year are still under discussion, but the temporary restrictions look set to continue to impact many next year). Existing plans imply total nickel unit output in the country will continue to surge for the next couple of years, likely exceeding 2.2Mt next year and pushing towards two thirds of global supply. While prices may bounce near term from current lows, the scale of the ongoing supply growth should outpace even the most optimistic demand scenarios and thus limit any room for prices to see a sustainable recovery.
India today looks very similar to where China was in 2000, with a looming wave of 20-year-olds, which gives rise to the same demographic dividend that helped drive China through the 2000s as it looked to create 20M new jobs a year
New energy materials bubble bursts
After stabilizing through October, lithium prices have fallen again in recent weeks as market concern over an expanding oversupply situation for next year comes increasingly into focus. While smaller, domestic Chinese lepidolite mine supply comes under pressure from low margins, and brine supply from Qinghai will reduce near term due to winter weather conditions, markets are looking beyond this near-term improvement in fundamentals since inventory levels through the supply chain in China from processers to auto manufacturers remain high.
EV sales in China should see their traditional peak into year end, especially as supportive policies continue to be seen with a focus of lifting EV sales outside of major cities. However, with plentiful battery inventory already available, auto manufacturers are not lifting their orders from processors because they remain concerned about potentially softer consumer demand next year.
Battery technology in China, meanwhile, continues to evolve at a fast pace, with lithium-ion-phosphate (LFP) power density and life cycles both continuing to be pushed further per latest R&D evolutions. The increasing share of LFP versus nickel-manganese-cobalt (NMC) in China (which has gone from only 30% in 2020 to over 70% now), will likely be replicated in other markets especially as China is now a significant exporter of EVs. This doesn’t mean lithium is the guaranteed winner longer term as other technologies also continue to evolve. The first commercial sodium-ion EVs have already launched in China this year, and battery makers continue to announce new advances in the technology, which may ultimately prove a threat to lithium.
