Samvat 2078: Demand to fuel supply crunch-driven rally in metals, crude oil

Auto manufacturing getting a big push from EVs, and global air traffic normalising are also likely to be major contributors on the demand side for metals and crude oil

A supply crunch-driven rally in metals and crude oil witnessed in the outgoing Samvat 2077 is expected to continue into the new Samvat 2078 as well, given that a sharp recovery in demand is seen as fears of the Covid-19 pandemic recede.

Overall, an improved demand, automotive (auto) manufacturing getting a big push from electric vehicles (EVs), and global air traffic normalising are likely to be major contributors on the demand side for metals and crude oil.

All base metals outperformed this Samvat year, with returns ranging between 30 per cent and 100 per cent. Crude oil prices have doubled. Copper and aluminium prices have surged 40 per cent. Other metals are up by at least 30 per cent. Tin prices, too, have doubled. All these commodities went up largely on supply crunch, followed by improving demand.

The moderation in iron ore price and China’s production curbs led to higher global steel prices.

In Samvat 2076, returns from commodities were around 10 per cent; in some like crude oil, there was a decline of as much as 30 per cent. 

Gnanasekar Thiagarajan, director, Commtrendz, a risk advisory firm, said, “The prime reason for metals to give very good returns this year is supply crunch created by lower mine output, improved demand for metals - following sharp rise in EV production - and China’s buying of metals for building its reserves.” 

He believes the EV demand will only rise with crude oil prices remaining high. This, along with demand recovery when mine production is unlikely to increase soon, will further push up the prices of metals.

Copper, for example, had seen closure of some mining capacity and fall in production during the previous year’s pandemic-triggered lockdown. Already, production was falling because of “lack of new discoveries in the last decade”, said S&P Global Market Intelligence. It also stated that in the past 30 years apropos copper mine discoveries, the 2010-2019 decade was the worst, with only one discovery in 2015. Mine closures were more.

The situation in other metals is no different. New mining capacities typically take years to build.

The battery-driven vehicle market is growing at over 25 per cent, with China’s production next year estimated at 13 million EVs. The US and other major European nations are expected to produce 4-5 million EVs each. This excludes the usual energy product-centric auto production.

In Samvat 2077, crude oil prices doubled largely because of production cuts by the Organization of the Petroleum Exporting Countries-Plus nations (which began last year), besides sharp recovery in demand with Covid-19 fears retreating.

In mid-November, oil-producing nations are meeting to review production cuts initiated earlier. If they decide to increase production, oil prices may moderate.

Nigam Arora, US-based algo analyst and author of The Arora Report, said, “The price of oil will be primarily determined based on negotiations with Iran over its uranium enrichment, which are likely to start soon. If Iranian oil comes freely on the market, expect oil prices to drop. A secondary factor is the upcoming winter season. If winter is colder than normal, it will help oil prices go higher.”

Anuj Gupta, vice-president-research, IIFL Securities, said, “Crude oil demand is expected to touch pre-Covid levels, but supply shortage is the main concern now. Industrial production may also resume full scale and demand has been escalating - supportive to industrial commodity prices.”

Arora, however, says, “Speculators are heavily bullish on oil and expecting it to hit $100 per barrel. Since almost everyone is on the bullish side, history shows there is more risk to the downside than generally anticipated.”