Volatility of the metal markets

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Alireza Moghaddam, Chairman, AMIDT Group
Mr. Alireza Moghaddam, Chairman, AMIDT Group

With the outlook for the global economy improving, the metals market is anticipating further price gains, especially in the second half of the year. The positive relationship between economic growth and metals consumption is of course well established.

From less than 3 percent in 2016, global GDP growth is set to witness a modest pick-up in the current year, to 3.3 percent, and further on to 3.6 percent in 2018.

With a strong but volatile outlook for the sector, the global mining and metals industry is focused on future growth through expanded production, without losing sight of operational efficiency and cost optimization. The sector is also faced with the increased challenges of changing expectations in the maintenance of its social license to operate, skills shortages, effectively executing capital projects and meeting government revenue expectations.

The World Bank predicted a 16% growth of the metal market in 2017 in the first half of the year, as there was a combination of strong global demand, a slow ramp-up in new capacity, tighter environmental constraints and policy action to limit exports will come into play.But the outlook was not without risks. A fed rate hike, outcome of European elections and impact on the euro and crude oil price movements will impact the outlook in varying ways.The policy pronouncements of US President Donald Trump were being closely monitored. In the second half of the year, there is an increasing evidence of the success or otherwise of his policies, which is sure to induce volatility in the metals market.

Without doubt, China is the mover and shaker of the world metals market. China has been destocking due to a credit squeeze; but there is expectation that the credit squeeze will soon ease, and the restocking cycle will emerge in the second half.China’s fixed asset investment was running strongly with marked improvement in private sector investment in the first half of 2017.

While world demand looks positive, it is the supply side that will be the differentiator. The world metals market will surely be sensitive to the potential of supply disruptions.Zinc, lead and copper are three base metals were widely expected to register price gains this year. Essentially a supply side story, zinc seemed to be already in a bull market with mine cutbacks and closures, as predicted in the first half of the year. Copper fundamentals too were set to tighten following mine supply disruptions due to strikes and floods. The World Bank had forecasted a 32 per cent rise in zinc prices this year and 18 percent in case of copper and lead.

In the first quarter of 2017, the sector of nonferrous industrial metals rose by 6.65%, but in Q2 they fell by 1.75%. In Q3, base metals were the best-performing commodities sector posting at 10.74% gain and were 16.11% higher over the first nine months of 2017. Base metals not only won the gold medal in Q3, but they are the leader in the commodities asset class so far, this year.

The best performing commodity in the base metals sector in Q3 was zinc which rose by 14.97%. Nickel was a close second with a gain of 14.2%, followed by aluminium with a rally of 11.42%. LME copper moved 10.36% higher in Q3. Copper on COMEX was 9.21% high, lead moved 9.48% to the upside, and tin was the laggard posting only a 4.02% gain. Iron ore, a ferrous metal, just 0.32% lower, but that is only part of the story as it rallied sharply and then corrected lower in September.

Base metal prices moved to the upwards as the U.S. dollar index moved 2.66% lower in Q2. The Chinese have been aggressively buying metals and other raw materials during Q3. It is likely that there are three reasons behind China’s aggressive stance in the raw materials. Firstly, there has been change in the Chinese developmental policies under President Xi since 2016. The Communist Party Congress is to assemble in the coming weeks to deliberate on and showcase Chinese economic achievements, and it is probable that buying in anticipation of the gathering means that China will roll out plans to further stimulate growth via further infrastructure building projects. Finally, and perhaps most significantly, the increasing tension on the Korean Peninsula and the potential for escalating rhetoric to turn to war in the region may be causing China to increase strategic stockpiles of commodities.

According to the IBEF report, India is the 3rd largest producer of coal. Coal production stood at 453.10 million tonnes in FY17. India has the 5th largest estimated coal reserves in the world, standing at 308.802 billion tonnes in FY16. In 2016, India contributed around 11% of the world’s production of coal. In FY17, production was expected to reach 175.51 million tonnes of iron ore.

India has become the 3rd largest steel producer in FY17 with the production of finished steel at 83.01 million tonnes. India stood as the 3rd largest crude steel producer in 2016, while its production increased to 90 million tonnes in FY16 as compared to 88 million tonnes in FY15. India accounted for 5.89% of the total steel production in the year 2016.
Rise in infrastructure development and automotive production are driving growth in the sector. Power and cement industries are also aiding growth in the metals and mining sector. Demand for iron and steel is set to continue, given the rapid growth expectations for the residential and commercial building industry.

India holds a fair advantage in cost of production and conversion costs in steel and alumina. Its strategic location enables convenient exports to developed as well as the fast-developing Asian markets.

Authored Article by: Mr. Alireza Moghaddam, Chairman, AMIDT Group

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