Commodity Analysis

Base metals: What to expect in 2019

G Chandrashekhar | Updated on January 06, 2019 Published on January 06, 2019

After a volatile 2018, what does the new year hold for the industrial metals market?

While 2018 was a hugely challenging and volatile year for the commodities market in general, base metals were buffeted by a series of events during the year. Those included several rate hikes by the US Federal Reserve that strengthened the dollar; escalating trade friction between two of the world’s largest economies — the US and China — that resulted in imposition of tariffs and retaliatory tariffs; and without doubt, signals of a slowdown in China, the mover and shaker of the global metals market.

Interestingly, base metal prices were higher in the first half of the year given the flow of positive economic data as well as sentiment among market participants. However, the mood failed to last long. The market slumped in the third quarter, primarily due to rising crude-oil rates (Brent above $80 a barrel in September), accelerated dollar strength and faltering confidence in global growth.

The escalating trade dispute between the US and China as well as US sanctions on Iran dealt a blow to market confidence as fears of a negative impact on the real economy and slowdown in economic growth gripped market participants. Exit of speculative capital exerted an exaggerated impact on metals prices as fundamentals moved to the sidelines. No wonder, most of the industrial metals ended the year even lower, with the LME (London Metal Exchange) base metals index at a one-and-a-half-year low. For instance, copper has fallen below $6,000 a tonne, aluminium moving close to $1,900/tonne and iron ore at $70/tonne, having lost $4 in a month.

Although there is currently a 90-day truce between the US and China — which only means a temporary easing of the conflict — slower economic growth expected in 2019 will prove to be a headwind for the industrial metals sector. If anything, investor sentiment towards these risky assets is likely to deteriorate rather than improve.

Slowdown

There is now a wider consensus that the Fed will pause the rate hike cycle by mid-2019, which should arrest the dollar’s upward momentum and possibly weaken it. Because the US has reached near-full employment, and the positive effects of the stimulus package (corporate tax cuts) are fading, it is highly likely the US economy — the engine of global economic growth — will begin to slow in the second half of the year.

The combination of an already slowing China and a potentially slowing US is not good news for the global economy and certainly not for base metals as the two countries are two of the largest consumers. In addition, towards the end of 2018, equity markets began to flounder, which in turn can exacerbate the negative sentiment in the industrial metals market. This is the headwind the world will have to inexorably ride out this year.

While there is reason to be bearish on the metals sector, weakness in the dollar — possibly beginning from the second quarter of 2019 — is likely to cushion the impact.

If the US lifts its sanctions on Russian aluminium producer Rusal, the market will witness increased supplies, which in turn will not allow prices to stay firm longer.

The prospects for copper prices appear less negative. Supply constraints are likely to prop the market up, pushing the rates above the psychological $6,000/tonne level and taking it towards $6,200/t. Steel production is most likely to slow globally in 2019 due to stricter pollution control measures in China. This will constrict demand for zinc used in galvanised steel and nickel used in stainless steel (SS). SS production in China has been subdued. Nickel has already fallen 30 per cent from a high of $16,000/tonne to $11,000/tonne. With supply increase and lacklustre demand, rates could decline 10 per cent.

The prospect of electric vehicles had surely revved up the nickel market to start with. However, EV is more of a medium-term story, and demand for nickel from this sector will pick up only gradually over time.

One known unknown in this scenario for 2019 is whether China will announce a major stimulus package. In that event, it could be a game changer for the metals market, depending on the nature of the stimulus.

The writer is a policy commentator and a commodities market specialist

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