China policy, dollar slide may lift base metals further

China policy, dollar slide may lift base metals further

Base metal prices have had a turbulent year amid supply disruptions, reduced demand and an uncertain investment climate. Next year is widely expected to be more stable but the complex is likely to still be driven by a depreciating US dollar, mine disruptions — for copper in particular — and Chinese policies.

This year's choppy price environment saw London Metal Exchange three-month copper prices hit a 2020 low of $4,618/t on 23 March before then soaring by 68.1pc to $7,760/t on 11 December. Other base metals followed a similar path with zinc moving up by 58.8pc, nickel by 55.5pc and aluminium by 44.3pc over similar timeframes.

Argus-assessed premiums have also strengthened since March. For example, Grade A copper cathode premiums hit a 12-month low of $20/t in-warehouse Rotterdam in March but then doubled to $40/t by mid-June. They now stand at $30-40/t. European zinc premiums have followed a similar trajectory, with a low of around $55/t in-warehouse Rotterdam in March but now standing at $70-100/t.

The recent, ongoing depreciation of the US dollar has been making base metals more affordable in emerging economies — particularly China — as it unlocks demand that was previously suppressed owing to weak purchasing power in domestic currencies. Demand from emerging economies is largely pent-up and a significant amount of construction work can be carried out at the "right" price. This is, however, likely to encourage price volatility as investors trade short-term futures, and forward curves are quick to change.

The dollar is widely expected to fall further in the near-term, in part a reflection of anticipated post-Covid economic recoveries and increased risk appetite, but also connected to political uncertainty as a new US administration enters the White House in January.

It will take some time for certainty to emerge regarding US policy and spending plans, which are also closely tied to metals consumption. The senate elections in Georgia on 5 January are but one piece of the complex puzzle needed to create a productive policy environment under Democrat leadership.

Meanwhile, Chinese government policies are also set to be a key base metals price driver in 2021, particularly as relates to credit availability and the yuan. Most favourable is the increased credit measures moving into 2021. China is growing its broad money supply base at a rate of 10.5pc and this is unlocking demand for construction and infrastructure in the country's central and western provinces.

On 15 December, the People's Bank of China (PBOC) issued 950 billion yuan in loans through one-year medium-term lending facilities designed to keep its four major banks in positions of strong liquidity. It is possible that they could lend these bolstered funds to construction projects in 2021. Meanwhile, cash injections have lately gone much further than expected, causing the yuan to stand at 6.5535:$1 on 15 December — a slide from 6.5717:$1 at the start of December.

On the supply-side, disruptions appear likely to derail the base metals industry yet again in 2021, with strikes by miners in Chile likely to continue amid discontent over contracts. A vote on a new contract for workers at Lundin Mining's Candelaria copper mine was fiercely rejected with a four-week strike. And although production rates are now recovering, tensions could flare up again next year.

In Peru, Covid-19 is expected to keep causing production outages as a vaccine rollout is likely to be slow. The virus has impacted production over much of the second and third quarters this year and Peru has so far registered almost 830,000 cases, the sixth-highest number in the world.

By Maximilian Court

Base metals price-change similar to most other election years Index

Base metals prices governed by a depreciating dollar Index