Three months can be a very long time in markets, the last three months particularly.
COVID-19 has upended the world as we know it, forcing millions of people into lockdown, wiping out global economic growth and triggering a massive government response, most recently in the form of a historic multilateral deal to prop up oil prices.
In the world of industrial metals, the coronavirus has generated an unprecedented demand shock and, as ever more mines close, a lagging supply shock.
Pity the analysts who have to try to make sense of this chaotic world.
Unsurprisingly, base metals forecasts have been slashed in the latest Reuters analysts poll relative to January.
Early-year optimism that demand would recover from a synchronized slowdown in 2019 has evaporated. It is now just a case of how low metals prices can go before some sort of recovery.
Median cash price forecasts for 2020 have been cut across the metallic board by anywhere between 21% (nickel) and 9% (aluminum) as analysts try to price the cumulative demand shock from a collapsed automotive sector, a partially locked-down construction sector and plummeting consumer confidence.
Goldman Sachs expects global demand for primary metal to fall by 5-6% in 2020, eclipsing the impact of the Global Financial Crisis (GFC) of 2008-2009.
The demand hit outside of China will be around 15%, “on a par” with the GFC, the bank says. The difference this time around however is that China’s stimulus will not match the shock-and-awe infrastructure binge of ten years ago.
Goldman expects Chinese demand for most metals to fall as well this year, particularly those most exposed to export markets, such as aluminum in the form of semi-manufactured products and nickel in the form of stainless steel.
The bank is one of the more bearish voices out there, but there aren’t exactly a lot of bulls.
The broad consensus seems to be that mine closures may mitigate but will not fully offset imploding demand, meaning a build in metal inventories.
If there is any good news, it is that analysts are looking for prices and demand to trough in the current quarter before staging a steady recovery.
The median forecast for copper over the next four quarters for example is $4,700, $5,000, $5,500 and $5,750 per tonne respectively, a pattern that holds true of all six metals traded on the London Metal Exchange.
The median forecast for copper this year has fallen by 16% to $5,200 from January’s $6,214. Only nickel has fared worse.
This is not down to the two having the worst fundamental pictures. Indeed, both markets are seeing a particularly high level of supply disruption centered on mine closures in Peru for copper and the Philippines for nickel.
Rather, the red ink reflects a reversal of early-year optimism which generated an influx of fund money in both metals.
It is telling that back in January analysts expected both markets to register supply-demand deficits this year, copper to the tune of 160,000 tonnes and nickel 31,000 tonnes.
Come April and the median forecast is for copper to register a surplus of 337,000 tonnes and nickel 89,000 tonnes.
Not one of the 13 analysts submitting a market balance estimate for copper expects a deficit this year. Forecast surpluses range from 20,000 tonnes (Morgan Stanley) to 920,000 tonnes (UBS).
And only two out of 11 expect nickel still to register a supply deficit, UBS and Robin Bhar Metals Consulting being the (relative) optimists.
The implication is that just about everyone is expecting a build in inventory over the course of 2020.
Aluminum is expected to register the biggest surplus of production over usage, implying a massive increase in stocks.
The median forecast is for a surplus of 2.89 million tonnes, up from an expected 350,000 tonnes in April.
The last financial crisis proved that aluminum is one of the slowest markets to generate a supply reaction to demand and price weakness. Turning smelters on and off is a lengthy and expensive business.
China’s giant smelter sector, moreover, has a long track record of excess capacity and over-production.
The early indications are that this time is going to be no different from 2008-2009.
Chinese aluminum output rose by 2% over January-February even though quarantines and lockdowns had eviscerated demand. A surge in March exports of semi-manufactured products to their highest level since May 2019 is a sign of what the rest of the world can expect.
It may be surprising, therefore, that analysts’ 2020 price forecasts have fallen by “only” 9% to $1,618 per tonne since the January poll.
But that is because aluminum was characterized by weak demand and low pricing last year and analysts were unenthusiastic about its 2020 prospects even in January, when it was expected to fall another 1%.
THE SCRAP DIMENSION
A similar case can by made for why lead forecasts have fallen by just 10% over the last three months.
The London lead price has spent much of the last two years grinding steadily lower from a February 2018 high of $2,685 per tonne to below $1,900 in December 2019. In January analysts weren’t expecting any bounce this year either.
But supply surplus estimates have been lifted only modestly to 158,000 tonnes from 95,000 tonnes in January.
Lead’s high ratio of secondary production - metal produced from recycled battery material - leaves it more exposed to disrupted retail collection networks.
The market has noticed that while Chinese stocks of most metals rose sharply over the country’s January-February lockdown period, those of lead moved in the opposite direction.
As of last Friday Shanghai Futures Exchange inventories of lead stood at just 8,325 tonnes, the lowest level since November 2018.
Lead’s production profile is particularly scrap-heavy, but recycled material is a key part of every industrial metal’s supply profile.
It has acted as a price stabilizer for copper in the past, and last year’s anemic primary aluminum demand was at least partly down to a proliferation of scrap in the North American market.
Unfortunately, scrap is also a particularly opaque price driver and one that is likely to be overshadowed by more headline-grabbing changes to the metallic landscape in the weeks ahead.
Analysts have enough on their plates trying to keep track of both fast-moving micro and macro price drivers.
How they react to this kaleidoscopic picture we’ll find out again in another three months’ time.
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