The past couple of months have featured a broad retracement of the metals complex, away from the recent highs. Markets were taken aback by rising uncertainties, including an early February equity market sell-off, and the trade conflict between the US and China. As Q2 unfolds, some of these uncertainties should be easier to interpret. However, price volatility and sporadic periods of increased market concerns will remain on the agenda in 2018.
While it may be premature to suggest that a peak risk-off sentiment has been reached, we continue to believe that many commodity markets have oversold in recent weeks. Despite some market uncertainty, the global economy is still expected to grow at its fastest pace since 2011. The US economy is still to feel the effect of the tax cuts, and emerging market economies are expected to contribute half of this year’s global growth. This should help many commodities to regain their positive momentum, once the risk of trade wars has diminished or is fully priced in.
We believe that the copper market is able to withstand the downtrend and bounce back above the levels seen so far this year. We believe that we have entered a period of long sentiment for copper. Mining companies need to commit to new Greenfield projects to avoid looming copper supply shortages. The concentrates market balance is set to tighten markedly, with the 2018 benchmark TC/RC (treatment and refining charges) trending at multi-year lows. Moreover, China’s environmental overhaul has targeted the country’s scrap sector through restrictive regulations that are set to limit scrap imports and shutter some scrap processors. The effects are already being seen - since November China’s monthly scrap imports have fallen at double-digit rates. Polluting copper smelters have also been targeted as part of the environmental clean-up, with some enforced production cutbacks already announced. If this continues, it is likely to constrain refined metal availability.
Meanwhile, the cobalt market continued to reach new highs. LME cobalt hit USD 95,000/t in late March. Metal Bulletin’s prices, on which most contracts are settled against, trade above the USD40/lb mark. These are price levels we haven’t seen since the rally of 2008. However, whereas 2008 rises were largely the result of a general exuberance amongst speculators, today’s rally is based on extraordinary demand fundamentals. The cobalt market has not seen anything like this previously, largely due to the increasing importance of two key demand drivers - game-changing technologies and regulatory changes. The impact of these drivers is hard to predict with total accuracy. Nevertheless, we believe that metals such as cobalt and copper will be the primary beneficiary of these changes in the long-term.
We believe that iron ore prices have returned to more realistic levels. The market could soon be confined to a narrow, range-bound trading. This would repeat the pattern observed for most of 2015, except that the “value over volumes” strategy that has been adopted by the major producers currently should prevent iron ore prices to plunge back to the lows of 2015.
Aluminium prices have tumbled over 10% in Q1. Recently, the market has been dominated by headlines concerning factories and plants in China restarting production following the end of winter cuts. However, we think that the news on China’s 2018 production increase has been overblown in the media. In our view, rising production costs in China will be the main supporter of aluminium prices going forward. Overall, considering the sector’s strong comeback in 2017, global investors are increasingly turning to commodities to diversify their portfolios and improve returns. We have seen changes in the investment climate, and portfolio allocations. Remarkably, this January marked the largest inflow into commodities since the end of the last decade; even surpassing the cumulative inflow for the whole of 2017, as estimated by JP Morgan