Many metals consumers normally buy if not spot then on a three-to-six-month time horizon. Still others book up to a year out. Those that fix for longer periods often publish annual sales price lists. These companies need to fix input costs to protect margins. However, that too comes at a cost. Of course there is a price to pay for such certainty in the form of higher premiums. For those with more flexibility in sales prices or those with lower metal amounts in their cost of goods sold, then variable input costs are acceptable, if not an unwelcome, risk.
So news from a recent Reuters poll of analysts that base metals prices could fall later this year and more significantly in 2023, does not provide much comfort in what remains an inflationary metals price environment.
Declining base metal inventory levels
Many will look at the surge in base metals prices since the first lockdowns. They have, after all, risen by up to 93% since 2020. Indeed, some climbed 38% over just the last year. This almost creates an an inevitability about them. Furthermore, the dwindling exchange inventories point to supply deficits across the metals spectrum (with the exception of lead it should be noted). Goldman Sachs maintains their position that the world stands short of base metals. In addition, the bank continues to hold firm its super-cycle position that prices have further to go.
Last boom from rising demand from China
But the main driver of metals prices increases in this century, came from rising demand from China. Finally, after two decades of unprecedented growth over such a short period, China’s growth looks fragile. The post notes Chinese factory activity has slowed. Both official and the Caixin purchasing managers indices slipped in January. The latter dropping to a 23-month low, according to Capital Economics, “…with Chinese demand unlikely to bounce back meaningfully this year, we continue to expect sharp falls in industrial metals prices by year-end,” the firm revealed.
That appears rather bold.
China’s weakened construction sector and energy crisis
Part of China’s weakening demand picture involves its construction sector. Evergrande the largest player along with many smaller firms, continues to struggle. Indeed, the dire state of the property market has pushed one state into losses trying to fund the winter Olympics investment. Its returns from construction have failed to meet budgets. China, however, suffers more than mere construction woes. It also shares an energy crisis with Europe. China’s structural over reliance on certain fuel types for energy production has contributed to energy rationing. This has impacted both metals output and demand. Coal remains the problem for China. Meanwhile natural gas shortages plague Europe. Both have resulted in reduced metals smelting and supply. In addition, both should ease with warmer weather and reduced electricity demand as spring approaches.
Aluminum, copper and tin prices
Analysts polled forecast aluminium to hold an average price in 2022 of $2780 per metric ton. Aluminum prices have already hit nearly $3100/mt so that leaves a lot of downside for later in the year. Copper seems particularly out of favor Reuters observes. The report says this year’s median forecast of $9,370 per ton is only 0.6% higher than last year’s cash average. Moreover, the price is expected to fall further to an average $8,700/mt next year. That softening of demand will likely lead to current supply deficits reversing to surpluses for some metals. Copper’s supply deficit of 37,000 tons could turn into a surplus of 286,000 tons in 2023. Only aluminium and tin will likely remain in supply shortfall next year. Zinc will likely come in balanced. Whereas nickel and lead could both record supply surpluses.
Prepare for volatility
In the short term, to the disappointment of buyers, volatility rather than lower prices will likely remain the norm. Towards the second half of the year, and certainly into next, a recovering supply scene and cooling demand, expected by many analysts could result in a softening of prices from current levels.
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Hardly a super cycle.
By AG Metal Miner
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