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This year’s London Metal Exchange (LME) Week has been a virtual affair of webinars and Zoom calls but the buzz of bullish excitement around copper has been very real.
Nickel won the LME Week beauty parade for the past two years as the market collectively reassessed the role of the stainless steel component in electric vehicle (EV) batteries.
That electric tingle is still there, as it is with other battery metals such as cobalt and lithium.
But it was copper that lit up the virtual space this time around thanks to the market’s current bullish optics and a future narrative of green infrastructure, with copper wiring at its core.
The pandemic remains the most important of all metal fundamentals
The two metals also topped this week’s Reuters poll of metals analysts in terms of price expectations for next year.
All LME metals are seen recovering from this year’s covid-19 demand collapse but large supply surpluses are expected to cap the upside for the likes of aluminum and zinc.
One word of warning for metals bulls, however.
Analysts’ median forecasts for 2021 are all below current cash prices with the single exception of under-performing lead. The good news may already be baked into prices after their stellar bounce from the depths of lockdown.
Even assuming the pandemic can be controlled in the months ahead, recovery outside China could be, to quote research house CRU’s chief economist Jumana Saleheen, “a long, hard slog”.
“Our pick is copper,” Citi’s Max Layton told the LME’s virtual seminar on Monday.
“I do think it’s a stand-out across the complex not just because it’s topical (but also because) it’s the one that has the highest probability of (supply) deficits,” he said.
Other panellists agreed and so does just about every other analyst, judging by the latest Reuters poll. A median forecast for a cash price of $6,800 per tonne next year represents a 12.5% rise from an expected average of $6,043 this year.
Analysts are rapidly revising their copper demand projections as they factor in green stimulus packages in China, Europe and, if Joe Biden wins the presidential election, the United States.
Whichever way you view the global drive to decarbonise, whether through the prism of electric vehicles, renewable energy or smart power grids, it translates into more copper wiring.
Copper’s new green credentials are being reinforced by robust current market dynamics as China soaks up the rest of the world’s excess metal.
The International Copper Study Group is forecasting a global market deficit this year, largely due to the statistical quirks of how China’s huge imports are counted. A significant portion may be going into invisible inventories in mainland China, but the effect is still to drain Western surplus.
Nickel will register the second strongest price performance next year relative to this with a median forecast of $15,157 per tonne, according to the Reuters poll.
The electric vehicle buzz around nickel hasn’t gone away but there seems to be an acceptance that, for now, battery demand is still dwarfed by the metal’s usage in stainless steel.
The EV narrative remains in its infancy and “some caution is in order for the EV price impact on nickel”, Ed Meir, commodities consultant to ED&F Man, told the LME seminar.
For now nickel’s old-economy metrics rule and that will translate into supply surpluses of 117,000 tonnes and 68,000 tonnes this year and next respectively, according to the International Nickel Study Group.
It’s noticeable that other battery metals such as lithium and cobalt took a back seat at this year’s collective metals market musing.
Previous exuberance has been dissipated by a year of weak demand, oversupply and sluggish prices.
The EV story may have stalled but it is likely to roar back into life over the coming year as ever more countries put electrification at the heart of their economic recovery plans.
New battery metals will “soar” over the next four years, while “traditional metals” will be “relatively flat”, according to CRU analysts, speaking at the company’s “Virtual Breakfast” on Tuesday.
Expectations for the rest of the LME metals pack are more subdued with long covid-19 symptoms in the form of high inventories.
The global aluminum market will register a supply surplus of over 3 million tonnes this year and inventories are climbing back towards the elevated levels seen in the wake of the global financial crisis, Eoin Dinsmore, CRU’s aluminum research manager, told the LME seminar.
Equally negative is the fact that China’s smelters are in the process of ramping up production again.
Meanwhile, the cumulative zinc market surplus this year and next could be in excess of 1 million tonnes, according to the International Lead and Zinc Study Group. The lead market surplus could reach almost half a million tonnes.
Lead is now the laggard of the LME complex and the lack of a “longer-term buzz factor” leaves it “the pariah for base metals investors”. Such was the downbeat assessment from Tom Mulqueen, head of research at AMT, also speaking at the LME seminar.
The all-important context for this year’s LME Week forecasts was the disembodied nature of what is normally a jamboree of cocktail parties, dinners and late-night clubbing.
The pandemic remains the most important of all metal fundamentals. As the U.S. Federal Reserve noted back in July, the path of economy recovery will depend on the course of the coronavirus.
China’s rebound has been extraordinary but recovery everywhere else is still very much work in progress.
There is significant potential for permanent economic scarring in the rest of the world’s manufacturing sector.
CRU warned that demand for some metals may not return to pre-pandemic levels until 2022 or 2023 and even that gloomy outlook assumes that the road to recovery can be maintained through a second wave of infection.
The future for industrial metals is undoubtedly bright as green stimulus revitalises traditional demand drivers.
But the fact that most analysts are forecasting average prices next year below current levels should tell you that it could indeed be a long, hard slog before the sunny uplands.
(Editing by David Clarke)
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