Following strong price gains in 2016-17, the base metals market began 2018 with a mild corrective descent before plunging steeply mid-year due mainly to the US-China trade dispute and China’s contracting economy.
The third and fourth quarters of 2018 saw price drops for nickel, copper, zinc and aluminium while tin and lead had marginal increases.
Cobalt was also affected by the ongoing market volatility, rallying to an all-time high of US$95,250 a tonne in March before dropping by more than 50% at year-end.
Data shows China’s gross domestic product (GDP) has decreased for the past five consecutive quarters and the country’s leader Xi Jinping has remained vague on Beijing’s plans for a wider economic stimulus.
In terms of both supply and consumption China is a key market for base metals and its economic growth has a strong impact on prices and market sentiment.
China's third-quarter GDP growth in 2018 was at a nine-year low of 6.5%, compared with 6.7% for the second quarter.
Overall 2018 GDP growth is anticipated to be 6.6% and it is expected that China will lower its economic growth target to 6%-6.5% in a March parliamentary session.
Forecasts from the International Monetary Fund for world GDP growth are 3.7% for both 2018 and 2019, including slower growth for the US and China at 2.5% and 6.2%, respectively.
India’s GDP is expected to grow by 7.4%.
Trade dispute foments uncertainty
Talks between the US and China are ongoing and have assuaged some investor concern, but until the dispute is concretely resolved the market uncertainty will persist.
According to Fastmarkets MB Research, China is planning new incentives to boost domestic consumption for goods associated with metal demand including auto and home appliances.
Along with any further economic stimulus, the measures could spark a brief recovery in metals prices but would need an established trade deal to sustain upwards price pressure.
Scotiabank analysts reported in mid-October that the global trade dispute was not only the primary driver of the base metals slump but that also it would continue to have an affect up to 2020 and potentially beyond.
Scotiabank said: “US-China trade concerns remain front-and-centre for commodity markets with no obvious end in sight.
“We now believe that the US-China trade dispute will remain a slow-burn drag on industrial commodity sentiment through to the 2020 US presidential election.”
The Scotiabank analysts pointed out that prices were down despite falls in base metal stockpiles, with nickel inventories at five-year lows and copper down 50% over the last six months.
Challenging macro environment
The nickel price was representative of the year for base metals, gaining 14% in the first half to reach a yearly high of US$15,745 before losing 25% of its value by late December.
Despite the price volatility, Australian nickel companies were busy with Poseidon Nickel Ltd (ASX:POS), Ardea Resources Ltd (ASX:ARL), GME Resources Limited (ASX:GME), Iluka Resources Limited (ASX:ILU), Mincor Resources NL (ASX:MCR), St George Mining Ltd (ASX:SGQ) and Western Areas Ltd (ASX:WSA) advancing development and expansion projects.
Copper followed a similar pattern across the year, but the worsening global macro conditions could potentially be offset by forecast declines in global copper production and inventories in 2019.
According to JPMorgan estimates, China’s demand for copper has risen by 5%-6%, with head of metals strategy at the global commodities group Natasha Kaneva saying Chinese copper demand was not as bad as people thought.
The Bank of America Merrill Lynch was more cautious, noting prices were under pressure and the macro environment would remain challenging into 2019.
Five-year nickel price. Source: tradingeconomics.com
Cobalt price correction
Cobalt’s price correction following its 2018 surge was expected by some analysts, with Benchmark Mineral Intelligence analyst Casper Rawles noting he had expected the market to correct but was somewhat surprised by how much.
Rawles said: “There were some exceptions to the rule, but from the end of quarter one and throughout 2018, we’ve seen prices decreasing and continuing to fall.”
Explaining the downward trend, Rawles pointed to the increase in the price basis of raw material feedstocks from the DRC going into China and the resulting credit availability and cash flowing in China.
He remained cautious looking ahead, saying “demand will continue to grow, consumption of lithium-ion batteries is going to grow, but as of right now there’s enough cobalt around to meet the needs of the market”.
Rawles expects the recent election uncertainty in the DRC to potentially have small supply disruptions but these would be short-lived and have no impact on prices.
Six-year cobalt price. Source: tradingeconomics.com
The price of zinc did not fare better in 2018 either, sitting at about 23% lower in mid-December than its January starting point of US$3,375 a tonne.
Zinc LME stockpiles are down to 120,000 tonnes from 250,000 in late July, with the near-critical inventory level to potentially create a short-term recovery.
Whether this will be sustained past the first quarter 2019 is a point of contention among analysts, as hard-to-predict factors around the US-China relationship and cautious investor sentiment have not subsided.
SBICAP Securities research analyst Kaynat Chainwala said base metal prices may remain subdued in the first quarter of 2019.
Chainwala said: “In March the US and China are expected to get into talks and this will be crucial for base metals.
“Brexit in March will also put the market in a cautious mode.”
Falling cobalt prices in December have led to a bearish outlook for the battery metal in 2019, as the market is expected to move into a surplus.
Fastmarkets head of battery raw materials research Will Adams said: “The fact the market did not rebound on news that Glencore was to halt exports from Katanga while it builds an ion-exchange plant [is] further evidence of bearish sentiment.”
“Even if exports are halted in the first half of the year, the market … will be well-supplied with stockpiled material.”
‘Heightened volatility’ in base metals industry
S&P Global downgraded its nickel forecast at the beginning of year from US$13,500 a tonne to US$12,000 for 2019 and from US$14,000 a tonne to US$12,500 for 2020.
Zinc was also slightly downgraded while the copper forecast remains steady at US$6,100 a tonne for 2019 before increasing by US$100 in 2020.
Moody’s said in an October note that it expected growth rates to be slow in 2019 but at a level supportive of a stable outlook.
The analysis pointed to trade tensions, tariffs, changing trade patterns and event risk as the drivers of price sentiment and that the company anticipated “heightened volatility” a hallmark of the base metals industry.