Metals may recover on positive oil demand-supply equation in 2019: Experts

After a year of downturns, resource commodities are expected to recover largely on the back of China’s economy recovering in 2019 on the back of government-infused stimulation and extension of production cuts by oil producing countries. 

Metals are likely to recover on positive demand-supply equation, while experts say crude oil may have bottomed out, even as the annual average price may be lower than in 2018. Iron ore and steel have headwinds, which may keep the commodities under pressure.

In 2018, all base metals, except tin lost between 12-22 per cent, while crude oil was also down around 20 per cent from the close of last calendar year.  Nigam Arora, a US-based financial market expert and author of the Arora Report, said that, “Selling in crude oil on oversupply and slowing global growth concerns is overdone. The Arora Report expects WTI to trade in the range of $42 to $65.” This means that Brent may again see a level of $70+ in the coming months.

Rahul Prithiani, director, CRISIL Research agrees. He expects Brent oil prices to average between $60 and 65 per barrel in 2019 against the 2018 average of $71.2.  Base metal demand may see an impact due to weakening growth in the US and its currency, but China will return as a buyer. Sandeep Daga, director, Regsus Consulting, a risk advisory and research firm specialising in metals, sees China to shine again as it plans to provide economic stimulus yet again in 2019. 

Daga said, “Commodity prices are in a sweet spot of declining supplies (due to cuts), rising demand (due to Chinese stimulus) and investment appeal (due to likely dollar weakness and for diversification) in 2019.” Thus, commodities could rebuild their strength next year.

Daga, however, cautions that recovery will be range-bound and will come with volatility. The year is expected to be challenging for iron ore and steel. Global steel prices continued their upward trajectory in 2018 rising 15 per cent primarily led by healthy growth prospects in China and lower supply in China after the clean air policy. Prithiani of CRISIL Research says, “We expects prices to decline from $577 a tonne (China FOB) to $520-550 a tonne in 2019 led by moderation of steel demand growth prospects in China and global protectionist measures which will keep trade in check.”

Cheaper steel globally is a threat for Indian steel companies. If the dollar weakens, the rupee will strengthen and imports could rise.  Crisil, however, expects domestic steel prices to fall in India by three-five per cent. 

The only solace for Indian steel makers is iron ore price outlook. Natixis Commodity Research is bearish on iron ore. It expects the seaborne market and China’s steel sector to be in significant surplus which will weigh on iron ore prices. Indian mines will have to keep their price at import parity and hence reduce raw material cost for steel makers.