Oil, nickel and iron gain shine in 2019 as demand worries plague investors

This year proved to be a difficult one for industrial commodities, with base metals, except for nickel, moving with every buzz emanating from the US-China trade war, the West Asia stand-off, and a decelerating Chinese economy.
 
Crude oil was one of the hottest commodities with a 28 per cent return. Nickel was an outperformer rising a staggering 32.1 per cent on falling supplies. Iron ore was another big gainer, but copper was up marginally, 4.1 per cent. All other base metals, fell by up to 12.3 per cent in 2019. Steel was almost flat, while thermal coal and natural gas were also among big losers.
 
“Demand worries were overblown and/or supply-side issues were not well appreciated by investors. In other words, the escalating trade-war had attached a ‘sentimental discount’ to commodity prices,” said Sandeep Daga, director, Regsus Consulting, a global commodity research firm.
 
During the year, the market was gripped by recession fears, and at the same time geopolitical and policy risks were flaring up. For the most part of the year, the market was under pressure due to the US-China trade war, which fuelled slowdown worries as manufacturing sentiment continued to deteriorate.
 
The domestic metal market was not an exception. “The domestic economic slowdown, disappointing macro data, dovish central banks, and strengthening dollar, all these didn't augur well for metal prices,” said Pritam Kumar Patnaik, head of commodities, Reliance Commodities. Even share prices of metal companies were down.
 
The S&P BSE Metal index fell 12 per cent in 2019, compared to a 15 per cent rise in the S&P BSE Sensex.
 
The firm grip of Opec (Organization of the Petroleum Exporting Countries) and its friends acting as cartel never allowed oil prices to be impacted by trade-war worries. The price of nickel moved up after Indonesia announced a surprise early ban on raw-ore exports. Copper, the industry barometer, because of trade tiffs, was also down till September. As the perception on trade-war front settled, this bellwether gained, showing signs that copper will lead in 2020. Iron ore was another outperformer, due to the disruption of output in large mines.
 
Things are now set to turn in favour of metal investors with trade dispute moving towards settlement. Industry organisations estimate the deficit in metals like copper and zinc to rise. Analysts also expect a reduction in aluminium production as its price remains stubbornly below cash costs of mining companies.
 
This will get reflected next year. Daga says that China has stepped up spending on infrastructure. Many commodities on charts are oversold compared to their current fundamentals. There are good chances that commodities steal the limelight in the first half of 2020, he says.

 
“Copper could surprise in 2020. A weaker dollar is a supportive factor for all commodities. If manufacturing activity around the globe improves, metals could rally sharply,” said Naveen Mathur, director (commodities and currencies), Anand Rathi Shares and Stockbrokers.
 
However, the going may need not be smooth for industrial commodities. Joel Hancock, metal analyst with London-based Natixis Commodity Research, has identified three macro themes that will drive commodities now on. These are phase two of US-China trade talks, US elections, and progress in Chinese economy. These could have a bearing on prices.