On the back of a challenging period for the industrial sector in 2019 – a year when it struggled with tariffs and experienced early signs of a demand slowdown, the unprecedented COVID-19 pandemic and ensuing disruptions came along. Prices of industrial metals, portraying a further decline in demand, triggered by wide-spread closures bringing activity to a stand-still, declined.
Albeit the impact initially proved to be persistent and possibly long-lasting, a rebound in metal demand, led by China, drove prices higher, while fears that a misalignment of supply and demand, which could have triggered an over-supply of inventories, eventually leading to further price drops, waned.
While other economies continued to flounder in the face of the coronavirus pandemic, China – a key player, quickly emerged from the COVID-19 related restrictions on movement and proved to be the fastest to recover economically, this providing firm support from a demand perspective.
Following a steep decline in Q1, metal demand in China, primarily driven by industrial production and construction, rebounded significantly. Unlike base metals; any nonferrous metals that are neither precious metals nor noble metals, the price of iron ore – the primary beneficiary from increased spending, particularly in infrastructure and construction, albeit remaining somewhat resilient, registered gains. After registering month-on-month increases in Q2, portraying this increased demand stemming from both China and other economies easing on the imposed lockdown measures, the base metal recorded double-digit year-on-year increases.
Prices of other industrial metals followed suit, some of which had been severely impacted, also pushing higher from significant lows. The improved sentiment for metal demand was also particularly profound in the recovery of copper prices - a barometer of the health of the global economy. Albeit supply disruptions concentrated in Latin America have largely supported the price of copper during the pandemic, the impact at the peak was significant. Despite registering double-digit year-on-year declines, the said industrial metal quickly recovered, with prices rebounding to pre-pandemic levels, now hitting the $7000 a tonne mark for the first time since 2018, as strong demand in China and hopes for a wave of green stimulus measures lifted the price of the important industrial metal.
Albeit a weaker US dollar, a better view on global economic growth, and stimulus fuelling Chinese demand are all playing an imperative role in broadening the recovery for such metals, risks do remain. As the pandemic is once again raging across many of the world’s advanced economies, doubts (at least for the short-term) are once again resurfacing, particularly should; the record-setting pace of infections once again crimp activity, hurting raw material consumption. Europe’s major economies; Germany, France, and Italy are all seeing outbreaks worsening, the latter two being left with no option but to introduce its strictest restrictions since the end of their respective lockdowns earlier this year.
Similarly, the US – a prominent talk given the election set for November 3, continues to struggle to contain the pandemic, while Asian countries present a less grim picture. Albeit this resurgent risk, possibly impacting the demand in the short-term, the surge in fiscal spending, particularly on infrastructural investment, to revive the economies will undoubtedly be set on a high going forward, with Industrial metals, indeed benefitting.
Case in point – Biden’s electoral promise; that of increased infrastructural investment, funded in part by tax hikes and fiscal stimulus. A Biden administration is expected to boost spending on both infrastructure and energy to support US growth.
Moreover, increased focus on renewable investments is boosting sentiment for metals, as a shift towards a low-carbon world tends to be more metals intensive. Industrial metals which may indeed benefit from the latter going forward are those particularly dependent on the consumption of autos. With calls for more environmentally friendly measures and the auto industry seemingly already reaching a bottom, we expect Nickel – used in batteries of electric vehicles, to profit.
While remaining cautious in the short-term given the current scenario, fenced by the COVID-19 pandemic, we believe that, in the near future, should the arguments conveyed above hold, industrial metals shall benefit. To this end, we favour corporates within the metals and mining industry, with robust credit metrics and sufficient liquidity, thus able to weather the current macro-economic environment and profit from possible opportunities that do lie ahead.
Disclaimer: This article was written by Christopher Cutajar, credit analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018. For more information visit https://cc.com.mt/.
The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.