Industrial Metals Monitor Metals supported by weaker dollar, stronger oil
Group Economics Casper Burgering casper.burgering@nl.abnamro.com
May 2015
Prices of steel and iron ore are slowly reviving, but will remain threatened by overcapacity Base metals prices dragged down by Chinese macro data, but soft dollar and higher oil add support Market balance for copper, nickel and zinc tightens, while aluminium remains oversupplied
Figure 1: Leading confidence indicators
China weighs on long term metals markets developments The trend in leading macro-economic indicators for the US and Europe are pointing up and our outlook for 2015-2016 is positive. Disappointing economic developments in the US and a further firming of economic growth in Europe have not managed to shift confidence in the metals markets. This is somewhat surprising given that, on average, these two regions together represent 29% of global base metals production and 25% of base metals consumption. Normally, this would have more of an impact, but the effect is overridden by China’s share of 43% of global supply and 49% of global demand in base metals markets. Therefore, developments in China still take the upper hand and continue to dictate markets’ direction. China’s slowdown continued in Q1 2015, prompting base metals prices to lose ground. Meanwhile, further targeted economic stimulus by Chinese authorities to prevent a hard landing, such as the recent rate hike, could boost metals demand.
Source: Thomson Reuters Datastream
Figure 2: Macro trends in China dictate prices
Source: TR Datastream, ABN AMRO Group Economics
Figure 3: Industrial metals price change
Source: Thomson Reuters Datastream
Falling Chinese macro confidence drags metals prices down The macro-economic climate index in China reached a post-crisis peak in early 2010 and then started its downtrend, alongside the softening of the Chinese economy. Given China’s impact on metals markets, demand (and thus prices) for base metals reacted parallel. Although the weighted average base metals price peaked one year later, the series soon followed the same path as the macro-economic climate indicator. The parallel direction of both series indicates that fluctuations in macro-economic conditions in China ultimately have a major impact on base metals market conditions. In light of this, it is very likely that the economic slowdown in China will have negative implications for demand in base metals markets going forward. Nevertheless, we think growth in base metals demand from China is still on the table, although the pace of growth will soften. We are projecting that in 2015 and 2016, per capita demand for Chinese base metals will grow by 7% and 8%, respectively. From an historic perspective, this growth outlook is clearly disappointing, but given the ‘new normal’ the level is still good.
‘April showers bring May flowers’ Conditions worsened in the ferrous sector (steel, iron ore, coking coal) in particular, while copper and nickel prices are also still below their 1 January level. The strengthening of the US dollar, the weakening of the oil price, persistent overcapacity in China and demand worries in Q1 were the main reasons for the price deterioration. Dark clouds continued to loom at the beginning of April, with disappointing GDP and trade data from China. But later in the month, prices for most industrial metals started to show a stronger recovery, with the exception of coking coal prices. The lift was caused by the weakening of the US dollar (due to the poor US GDP data for Q1 and the Fed’s postponement of a rate hike) as well as higher oil prices. But hopes were also heightened by the prospect of more Chinese economic stimulus measures (and thus higher metals demand).