Volatility of the metal markets

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 lessthan 3 percent in 2016, global GDP growth is set towitness a modest pick-up inthe current year, to 3.3 percent, and further on to3.6 percent in 2018.

With astrong but volatile outlook for the sector, the globalmining and metalsindustry is focused on future growth through expandedproduction, without losingsight of operational efficiency and costoptimization. The sector is also facedwith the increased challenges ofchanging expectations in the maintenance of itssocial license to operate,skills shortages, effectively executing capitalprojects and meeting governmentrevenue expectations.

The WorldBank predicted a 16% growth of the metal market in2017 in the first half of theyear, as there was acombination of strong global demand, a slow ramp-up in newcapacity, tighterenvironmental constraints and policy action to limit exportswill come intoplay.But the outlook was not without risks. A fed rate hike, outcomeofEuropean elections and impact on the euro and crude oil price movementswillimpact the outlook in varying ways.The policy pronouncements of USPresidentDonald Trump were being closely monitored. In the second half of theyear,there is an increasing evidence of the success or otherwise of hispolicies,which is sure to induce volatility in the metals market.

Withoutdoubt, China is the mover and shaker of the world metalsmarket. China has beendestocking due to a credit squeeze; but there isexpectation that the creditsqueeze will soon ease, and the restocking cyclewill emerge in the secondhalf.China’s fixed asset investment wasrunningstrongly with marked improvementin private sector investment in the first halfof 2017.

While worlddemand looks positive, it is the supply side thatwill be the differentiator.The world metals market will surely be sensitive tothe potential of supplydisruptions.

Zinc, leadand copper are three base metals were widely expectedto register price gainsthis year. Essentially a supply side story, zinc seemedto be already in a bullmarket with mine cutbacks and closures, as predicted inthe first half of theyear. Copper fundamentals too were set to tightenfollowing mine supplydisruptions due to strikes and floods. The World Bank hadforecasted a 32 percent rise in zinc prices this year and 18 percent in caseof copper and lead.

In the firstquarter of 2017, the sector of nonferrousindustrial metals rose by 6.65%, butin Q2 they fell by 1.75%. In Q3, basemetals were the best-performingcommodities sector posting at 10.74% gain andwere 16.11% higher over the firstnine months of 2017. Base metals not only wonthe gold medal in Q3, but they arethe leader in the commodities asset class sofar, this year.

The bestperforming commodity in the base metals sector in Q3was zinc which rose by14.97%. Nickel was a close second with a gain of 14.2%,followed by aluminiumwith a rally of 11.42%. LME copper moved 10.36% higher inQ3. Copper on COMEXwas 9.21% high, lead moved 9.48% to the upside, and tin wasthe laggard postingonly a 4.02% gain. Iron ore, a ferrous metal, just 0.32%lower, but that is onlypart of the story as it rallied sharply and thencorrected lower in September.

Base metalprices moved to the upwards as the U.S. dollar indexmoved 2.66% lower in Q2.The Chinese have been aggressively buying metals andother raw materials duringQ3. It is likely that there are three reasons behindChina’s aggressive stancein the raw materials. Firstly, there has been changein the Chinese developmentalpolicies under President Xi since 2016. TheCommunist Party Congress is toassemble in the coming weeks to deliberate onand showcase Chinese economicachievements, and it is probable that buying inanticipation of the gatheringmeans that China will roll out plans to furtherstimulate growth via furtherinfrastructure building projects. Finally, andperhaps most significantly, theincreasing tension on the Korean Peninsula andthe potential for escalatingrhetoric to turn to war in the region may becausing China to increase strategicstockpiles of commodities.

According tothe IBEF report, India is the 3rdlargest producer of coal. Coal productionstood at 453.10 million tonnes inFY17. India has the 5th largest estimated coalreserves in the world, standingat 308.802 billion tonnes in FY16. In 2016,India contributed around 11% of theworld’s production of coal. In FY17,production was expected to reach 175.51million tonnes of iron ore.

India hasbecome the 3rd largest steel producerin FY17 with the production of finishedsteel at 83.01 million tonnes. Indiastood as the 3rd largest crude steelproducer in 2016, while its productionincreased to 90 million tonnes in FY16 ascompared to 88 million tonnes inFY15. India accounted for 5.89% of the totalsteel production in the year 2016.

Rise ininfrastructure development andautomotive production are driving growth in thesector. Power and cementindustries are also aiding growth in the metals andmining sector. Demand foriron and steel is set to continue, given the rapidgrowth expectations for theresidential and commercial building industry.

India holdsa fair advantage in cost ofproduction and conversion costs in steel andalumina. Its strategic locationenables convenient exports to developed as wellas the fast-developing Asianmarkets.

AuthoredArticle by: Mr. AlirezaMoghadam, Chairman, AMIDT Group

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