Metals in post-Trump rally blues

Base metals are, for the most part, consolidating after the bullish moves that followed the US elections in November. 

The stronger prices led to a pick-up in supply and some producers were able to increase output in response. However, the higher prices also boosted volumes of hoarded scrap entering the supply chain. The market is now working off the extra supply that emerged.

Some in the market are taking the subsequent softening of prices as a sign that the bull market is over. And, believe a slowing global economy would now lead to a multi-quarter correction in metal prices. We disagree with this idea.

Some economic data has softened. Notably, the Chinese manufacturing PMI data for April. However, increases in both import and export, according to recent Chinese and Japanese trade data, are healthy signs. All the PMI manufacturing numbers we follow are also above 50, indicating expansion. So, we would not get too bearish on the demand outlook. As the recent US Federal Reserve statement went, after a May 3 meeting, the recent growth weakness is “transitory”.

More to the point, after a few years of economic downturn, consumers have been reluctant to re-stock. Improvement in economic activity could prompt re-stocking and that can be bullish for base metals.

The main concern seems to be about China’s efforts to dampen the property market by reining-in credit availability. But, as we saw on May 3, the People’s Bank of China seems ready to pump money into the financial system when needed. We expect more infrastructure projects to unfold; over the past 18 months or so, environmental clampdowns have been far more effective.

We see demand for most metals being influenced by the same macro economic factors but supply-side factors are likely to determine price direction. Zinc and lead prices have performed well since early 2016 but, amid the threat restarts of idle capacity, might remain capped if well supported until restarts are announced. Nickel prices have lagged the other metals; the decision to relax ore exports by Indonesia is the main reason. If Philippines decides to rein in production, we would expect nickel prices to begin rallying.

Tin prices seem set to rally further. Stocks are low on the London Metal Exchange and the Shanghai Futures Exchange. We remain bullish for tin.

The outlook for copper is mildly bullish. Reduced capital investment in recent years has delayed the start-up of new mines and the industry faces supply deficits for the next few years. A high level of stocks should act as a cushion against prices rising too far but a return above $6,000 a tonne is expected later in the year.

For aluminium, despite off-market stocks, the reining-in of supply in China, to accelerate later in the year, looks set to create deficits this year and the next. Regional tightness in America and a strong demand profile should keep prices buoyant, as long as interest rates and backwardations do not lead to unwinding of off-market financing deals. 
 

The author is senior metals analyst, Metal Bulletin