Metals in 2018: The industry is cleaning up

Charles Gibson, analyst at Edison Investment Research, looks at the year ahead for metals.

If metals markets could be described in 2017, they might be encapsulated by the phrase, ‘the great divergence’. Throughout 2015 and the first nine months of 2016 the degree of divergence in the prices of the 17 metals and minerals regularly tracked by Edison was minimal.

Afterwards, it exploded. While it might be tempting to attribute this to the election of Donald Trump as president of the US, this may not be entirely fair. Initially, China’s initiatives to clean up its back yard, with a suite of measures aimed at curbing dirty coal production, provided the impetus for a tripling of the coking coal price and associated strength in the iron ore price, which once again largely confounded analysts’ expectations.  

However, what can probably be said with reasonable certainty is that 2017 was the year that metals contributing to the ‘clean’ economy distinguished themselves from the rest of the pack.

Four out of the five top performing metals in the 15 months to January 2018 were drawn from this constituency, namely cobalt (+174%), vanadium (+140%), copper (+49% despite being written off in mid-2016 as destined to wilt under a wall of newly mined supply), and palladium (+46% in sharp contrast to its dirtier sister metal, platinum, which was one of the worst performers).

The price of palladium has reversed its traditional discount to the price of platinum and is widely tipped to overtake the price of gold. Such has been its rise that cobalt (usually priced in US$/lb) could now be priced in US$/oz – at c US$2.25/oz, it is not far from the price of silver as recently as 1992. There was even a late bounce in the price of nickel as the renewables/energy storage/battery/ electric vehicle story broadened its appeal.

As a result, the average return over the period for all 17 metals and minerals was 37%. Even gold, which was towards the bottom end of the spectrum, returned a creditable 17% to investors over 2017 in US dollars (metal price data sourced from Thomson). Gold, equity indices and mining indices moved more or less in tandem until the middle of the year when mining indices suddenly took off, and until Q4, when general indices also took off.

Over the 12 months, general mining indices outperformed general price indices (in the form of the Dow Jones and the FTSE 100 index), which outperformed gold, which in turn outperformed gold mining indices. For once, small cap shares tended to outperform large cap ones. In a reversal of recent form, London mining indices outperformed Australian ones, which outperformed Canadian ones. One other feature of the market was the skew in returns recorded by individual companies, eg while the average total return of the top 10 risers in the Bloomberg World Mining index was 160%, the average of the bottom 10 fallers was only -15% (the index rose 32%).

 In 2018 we anticipate that the trend will continue to be investors’ proverbial friend as long as China continues to grow, the US shows no sign of tripping itself up and no geopolitical upset appears to spoil the party. We expect base metals to continue to outperform precious metals (which should nevertheless continue to be held as an insurance policy), with a special focus on battery metals, and explorers to continue to outperform majors. However, as always, as and when the macro environment changes, investors should be poised to reverse course rapidly