Gold and silver prices are not alone in rising sharply this year. With some base metals up by as much as 50%, are we seeing a market recovery or just a blip?
Macroeconomic and geopolitical uncertainty has fueled the price of safe haven assets such as gold and silver by as much as 22% and 36% respectively in 2016. However, base metals have also rallied since the start of the year and are up by 25% on average, led by zinc with year-to-date gains of 50%.
This comes despite a tumultuous global macroeconomic environment, which has included Britain voting to leave the EU, negative interest rates in Japan and Europe, a stock market crash in China, fears of currency devaluation and the upcoming Presidential election in the United States.
The postponement of Federal Reserve rate increases, when the market had expected multiple rate increases at the beginning of the year, has resulted in a relatively weak dollar performance versus other currencies. The dollar index has declined by 3.5% year-to-date, which helped boost commodities as they are typically denominated in U.S. dollar terms.
Solid performances in some commodities are also supported by favorable fundamentals, with zinc, nickel and palladium markets boosted by relatively constrained supply and robust demand growth.
Elsewhere however, price rallies seemed to be driven by short term sentiment as unfavorable fundamentals might return to cast gloom over the markets again. This has occurred, for example, with copper and aluminum, where demand has failed to catch up with supply growth.
With the final quarter of the year under way, our GFMS has taken a look at the fundamentals and considered the outlook for a range of key metals.
Gold
The gold price in dollar terms jumped by 9% on an intra-day basis after the Brexit vote, to nearly $1,360/oz, the highest level since March 2014.
Gold in sterling terms recorded even more pronounced gains, soaring by 18% from the previous day’s close. Gold is likely to retain its status as a risk hedge for the remainder of the year, particularly as uncertainty persists and risks to the global economy remain elevated.
Copper
Copper prices have been on a firm downtrend since 2011.
Since hitting a near-seven year low of $4,318/t on an intra-day basis in January, the price has largely fluctuated above these lows in a $4,500-5,100/t range this year. For this year as a whole we forecast an LME 3-month average of $4,812/t, down 12% on the previous year.
Global copper demand growth is expected to increase at a 2% pace in 2016. We have lowered our 2016 Chinese demand growth forecast to 2.9% year-on-year.
Copper mine production was up around 5% year-on-year in the first quarter, helped by fewer than usual disruptions, and strong growth in Peru where output surged by more than 50% year-on-year.
Aluminum
After hitting a near seven-year-low of $1,436/ton in November last year, the LME 3-Month aluminum price remained subdued in early 2016, and traded in a narrow range of $1,450-$1,550/ton until the beginning of March.
Having decisively broken the $1,550/ton resistance level aluminum is now firmly trending upwards beyond $1,650/ton.
The global market is expected to remain in surplus this year and next. With global production increasingly skewed towards China, we are seeing a divergence in the market balance — the world excluding China continues to see deepening deficits while surpluses continue to build up in China.
Zinc
Zinc prices continued to outperform the rest of the base metals complex over the second quarter. The zenith of $2,116/ton was recorded in late June, and was the highest level since early June 2015.
Zinc prices averaged $1,923/ton in the second quarter of 2016, up 14.2% on the previous quarter.
Zinc mine closures and cutbacks have started to have an impact on the concentrate supply-demand equilibrium. Supply tightness is felt most keenly by Chinese smelters as the country produces almost half of the world’s refined zinc.
Zinc prices are expected to rise further in the rest of the year as concentrate supply tightens further. Overall, we forecast LME three months zinc prices to average around $1,940/ton this year, up 0.6% year-on-year.
Lead
The “laggard” of the LME base metals complex has only recently shown that it has some momentum to extricate itself from the doldrums.
When compared with sister metal zinc, these diverging price paths are supported by the respective fundamentals of the two metals and are also reflected in zinc’s return since mid-March to trade at a premium to lead from a discount of a similar magnitude only last December.
Improved margins generated by better prices for major by-products, improved lead concentrate availability (mainly domestic) and higher realised treatment charges are all encouraging primary lead smelters to boost output. A number of by-products prices have rallied strongly or at least shown signs of bottoming out.
In the meantime, the demand side for lead does not paint a rosy picture. On January 1st 2016, China levied a 4% consumption tax on lead-acid batteries (LAB). LAB production growth had already slipped into negative territory in 2015, falling by 4.5% year-on-year, according to the China Battery Industry Association.
Taking a closer look at the end-use breakdown of Chinese LABs, around one-third are used in e-bikes according to the CBIA. The consumption tax will “hurt” LAB production as producers’ margins are squeezed.
Given that LABs account for 80% of lead usage, demand for the metal is highly exposed to the LAB industry and by extension to developments regarding e-bikes. Moreover, growth in other comparatively smaller areas of LAB consumption such as vehicle production and property construction, do not look especially rosy in the near to medium term.
Nickel
The global primary nickel market looks on course to record a bigger deficit than we had previously expected this year, to the tune of 41,000 tons.
Global nickel output is on course to fall by close to 4% and demand is set to increase at more than 3%, fuelled by a return to positive growth in China’s stainless steel sector.
The recent strong rally in nickel prices is running ahead of the fundamentals in our view, suggesting a pull-back should occur. In the first half of 2016, prices have averaged just over $8,704/ton, and for the full year we forecast an average of $9,575/ton.
Concerns that the Philippines, now the key supplier of laterite ore to China’s NPI producers, will go the same way as Indonesia and halt exports were largely responsible for the recent price surge.
Iron ore & steel
During the first half of 2016, spot and future prices for both iron ore and steel rebounded from the low levels of end-2015.
Since the beginning of the year until July, the iron ore benchmark for immediate delivery to China’s Tianjin port has risen by 30% while the most traded benchmark for construction material rebar on the Shanghai Futures Exchange increased by 36%.
We expect however, that a weaker property industry in China in H2 2016 compared to the first half will have a negative impact on demand for steel and subsequently for iron ore.
We believe that the iron ore benchmark for immediate delivery to China’s Tianjin will fluctuate on average within a range of $45-$50/ton in 2016.
Platinum
GFMS forecasts the platinum price will continue to recover in 2017.
As a result of the severity of the fall in the platinum price over the past two years in particular, mining economics will likely remain under strain if it is not accompanied by a continued bear run on the South African rand.
On the demand side, platinum’s use in autocatalyst applications is expected to rise at a 3% compound annual growth rate, due mainly to growing car sales and more stringent emissions legislation in China.
Palladium
The palladium market has seen a noteworthy run of deep deficits, particularly over the last three years.
During this time, this relatively niche metal has attracted substantial interest from a broad church of the investment community. In the face of a widespread investment exodus from commodities over the past year, many investors have opted to exit palladium positions.
As a consequence, despite what was from a physical perspective another deep deficit year in 2015, investor liquidity left the net balance as only a modest deficit last year.
Deep deficit markets in 2016 and 2017 are forecast to draw more than 2 Moz of bullion inventory into industrial products and this continuing market strength will see prices shine again, pushing up to average above the $700/oz mark in 2017.
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