2020, a 'gloom, doom and boom' year for metals amid Covid-19 pandemic

The year 2020 is one of those in which industrial commodities like metals and oil have seen extremes, both on the upside and downside. While Covid-19-led lockdowns across the globe destroyed demand in the early part of 2020, a supply cut-driven rally and sharp recovery in the auto sector have emerged as big themes. Domestic demand for these commodities, for instance, has seen a spike from September and is likely to increase further.

T Gnanasekar, founder, Commtrendz Research and Fund Management, said: “2020 was a gloom, doom, and boom year for metals. The year began on a gloomy note as the virus spread began and by late March the doom set in, with all markets collapsing. But, supply-side issues related to Covid restrictions, fiscal stimulus packages, and a strong auto-sector rebound reversed the doom to the present boom scenario.”

Price movements in iron ore and copper were particularly sharp. Copper, the bellwether for the global economy, scaled in December to its top levels after 2013, while iron ore is at a lifetime high. Steel is also the highest since 2008. Metals prices are up between 10 and 27 per cent in 2020 so far. Lead, however, is trading marginally higher than the 2019-end levels.

Brent and WTI crude oil are exceptions and still trailing below prices at the end of last year. Oil saw its first-ever trade at negative prices for delivery in the spot market, meaning a buyer gets oil as well as money.

The major reasons for a sudden fall in commodity prices were the virus and the lockdown in China (especially in the Wuhan region) initially, which resulted in the stoppage of production and thereafter disturbances in world shipping movements and further lockdowns in many countries and congestion in ports, paralysing production. In the US, the largest oil storage place was full, which resulted in WTI closing $37 negative in April on contract expiry, something unusual in the history of commodities’ markets.

In India too, several brokers stopped trading in oil for a few weeks following MCX-settled oil contracts turning negative and some brokers incurring huge losses.

Sunil Duggal, Group chief executive officer, Vedanta Ltd, says after a turbulent 2020, which saw demand for metals and oil collapse, there is a steady recovery since September as the global economy bounced back.

“We expect 2021 to be much better in terms of demand and price realisation for both base metals and oil as vaccine programmes are rolled out on a war-footing and there are no more disruptions, thereby facilitating a sharp rebound in economic growth. While oil did face headwinds due to the lockdown and reduced travel, we are witnessing demand for various fuels come back to pre-Covid levels. Thus, oil prices too should see an uptick as broader recovery sets in,” says Duggal.

According to commodity analysts at Nirmal Bang Securities, “Opec (Organisation of Petrol-eum Exporting Countries), along with other producers, decided to continue with oil production cuts. The reduction is 6-7 million barrels per day (mbpd). In the past even 1 mbpd cut used to make a huge impact on prices.”

In the near term though, prices may see some pressure on oversupply in the US and the new virus strain impacting Europe. In the latter part of 2021, prices could move up as vaccine availability increases trade, tourism, and other activities, thereby fuelling demand.

Steel and iron ore mines in India are encashing the bull run in these metals, driven by auto sector revival. All companies have been raising prices with each passing month. And the upward journey is likely to continue.

However, metals led by copper may see some correction shortly. An analyst said: “Copper could slip if speculators, which are holding their largest net long positions on the London Metals Exchange and Comex exchanges since 2017, turn less bullish and cut their positions.”

But Gnanasekar says, “As the demand response is expected to prop up commodity prices, vaccines and hopes of the pandemic ending will improve growth prospects. Interestingly, the past year has seen no fresh capacity addition in mining, which could accelerate prices. Demand will be strong across sectors as economies open up after Covid.”

However, he cautions about the possibility of supplies increasing gradually.