Download FOCUS • Base metal prices: a flimsy recovery

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INTERNATIONAL ECONOMY
FOCUS • Base metal prices: a flimsy recovery
For the year to date, the price of all the industrial metals
known as «base metals» (aluminium, copper, nickel, lead,
zinc and tin) has risen by 9.5%, with substantial increases
in the price of zinc (42.4%), tin (25.6%) and nickel (15.8%).
These figures contrast with the downward trend in prices
in preceding years and have stimulated debate as to
whether we are witnessing the end of the adjustment
in base metal prices or merely an (upward) interruption
in a (downward) path.
To answer this question we must first apply the
appropriate timeframe. Metals, like other commodities,
tend to move in long-term cycles sometimes called
«supercycles». Specifically, the current long-term cycle
is believed to have started in 2003. As can be seen in the
graph, base metals quadrupled their price between 2003
and 2007, then went through a slump due to the Great
Recession in 2008-2009 and afterward recovered their
cyclical peaks in 2011. Afterwards prices plummeted
by 50% up to the end of 2015.
Having situated prices within the right timeframe, we need
to examine whether the factors determining the longterm cycle for base metals are still the same or are fading.
From the point of view of demand, the essential aspect
to take into account is the shift towards the emerging
economies and particularly towards China. According
to the World Bank’s figures, the Asian giant went from
consuming 17% of all the world’s refined metals in 2003
to 51% in 2016. For this reason, changes in Chinese demand
for metals largely condition the trend in their world
consumption: while, in the upward phase of the supercycle
(2003-2007), Chinese demand for refined metals grew
by 20% per year on average (and the global total by 6%),
in the period of adjustment of 2012-2015, Chinese
consumption rose by 10% and global demand by 5%.
So how has supply reacted to this growth in China’s
consumption of base metals? By placing an increasing
amount of product on the market. Between 2003 and 2015
the production of aluminium increased by 110%, that of
iron by 80%, lead by 72%, copper and nickel by 47% and
zinc by 45%. This is the result of considerable investment,
with the top 10 firms in the metal production industry
investing less than 10 billion dollars in 2003 but 400
billion in 2014. However, and in response to the more
contained outlook for demand, this upward trend in
investment has gradually adjusted in the second half
of the supercycle. For example, investment by the top
10 companies fell by 20% between 2012 and 2014. With
regard to production, the response is much more selective
as appreciable reductions have been recorded in the
production of iron ore and copper but not in aluminium,
nickel or zinc, which has actually continued to increase.
SEPTEMBER 2016
Given this situation, what lies behind the change in 2016?
Since the supply conditions have not varied substantially,
the explanation must lie in demand. The demand
forecast for 2016 is slightly different to the slowdown
recorded in previous years. In particular, demand is
expected to be strong in the three metals with the
largest growth (zinc, tin and nickel), something which
has been interpreted as a result of the impact of the
infrastructure programmes and measures to boost credit
in China. 1
Does this situation imply a long-term change in the
underlying fundamentals of metal prices? Probably not.
If we look at the prospects for China’s metal demand
based on the route map established in its Five Year Plan
for 2016-2020, we can see that the two most important
metals (iron and copper) will not benefit greatly from
an economy that is transitioning towards a model with
a greater share of services and consumption. However,
some of the light metals which are already posting
surprisingly strong increases (in particular zinc) will see
their demand grow in the future. 2 Nevertheless, given
that these metals make up a smaller share of the total,
the outlook for the group is still downward, a conclusion
that is reinforced when we compare the current longterm cycle with other previous cycles. This does not
mean that, in the short-term, the rally observed will
not last for some time but it will be highly focused
on specific metals.
Base metals: prices
Index (100 = January 2013)
450
400
350
300
250
200
150
100
50
Note: Weighted index of the cash prices for aluminium, copper, nickel, lead, zinc and tin.
Source: CaixaBank Research, based on data from the London Mercantile Exchange.
1. Financial factors have also been put forward, such as greater investor
appetite for commodities in general and expectations of the Fed delaying
its monetary normalisation, weakening the dollar.
2. Zinc is used especially in industries related to electronics, which
will be intensified in China’s expected transformation towards a more
technological economy with greater development of urban transport
infrastructures and a larger share of consumption.
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