Base metal prices continue their upward trajectory. Meanwhile, we have identified several potentially bullish items (and a few bearish items) related to growing demand and rising supply-chain costs.
Global Supply / Demand. Wood Mackenzie is expecting Chinese primary aluminum consumption to grow by 2.7 percent in 2021. They assess the 2021 aluminum market in a 1.8-million-ton surplus. In copper, Citibank predicts the copper market to move into a deficit in the second half of the year with a minor surplus overall for 2021, followed by deficits in 2022 and 2023. Macquarie Bank expects a copper deficit of 226kt in 2021, down from their previous estimate of 247kt surplus. Morgan Stanley expects Nickel to move into a deficit in 2021 of 18,000 tons.
US Tax Rates. Both corporate and personal tax rates are at risk of rising under the Biden administrations latest infrastructure plan. The plan calls for a hike in the corporate tax rate to 28%, up from the existing 21%. The changes would undo the 2017 tax cuts implemented by the Trump administration. The plan would also raise taxes on high earning individuals. In a study of the plan, the Wharton School estimates the new plan would reduce U.S. debt by 6.4% and lower GDP by 0.8% in 2050 as compared to current law. The study also concludes that the plan wouldn’t significantly reduce business investment. Moderate Democratic Senators Joe Manchin and Mark Warner have already voiced concerns about the plan, stating that changes are needed before implementing the plan.
China Demand. In China, record 1st quarter GDP growth of 18.3% should be discounted due to the severe containment efforts deployed in 1Q20 to combat Covid-19. The Chinese GDP figures slowed on a quarter over quarter basis to 0.6%, down from 2.6%. The IMF expects the Chinese economy to grow at a pace of 8.1 percent in 2021, after being the only major economy to grow in 2020. Global growth is expected to rebound to 5.5 percent this year. While China’s growth still has a material impact on markets, we note that Chinese growth is not expected to reach pre-pandemic levels, and growth had already begun to slow before Covid.
Interest Rates. The U.S. Federal Reserve’s commitment to zero or low interest rates for an extended period continues to support capital investments. Despite this pledge, the yield curve had steepened significantly on market expectations of future inflation with 10-year Treasury yields climbing above 1.75%. Federal Reserve Chair has seemingly calmed markets for the time being with current yield sitting at 1.56%. Metals prices continue to be supported by very low short-term rates, and Federal Reserve Chair Powell has not backed off his commitment to low rates to support the economy. The Fed is waiting for growth and inflation rather than forecasted growth and inflation before tightening policy at all.
U.S. Stimulus. Deficit spending has supported consumer demand and incentivized employment, therefore supporting manufacturing. The $1.9T stimulus includes $10B for Infrastructure with individuals also receiving checks. Further infrastructure bills are on the horizon.
USD. A weaker USD generally contributes to stronger pricing for internationally traded commodities. The dollar climbed higher and then retreated over the last several weeks, the DXY index is currently at 91.09 as of the time of writing. DXY climbed to a high of 93.30 on March 30th before retreating to current levels. The USD weakness over the past few weeks has supported prices but the correlation has not been consistent..
Supply Chain Logistics. Supply chain complications and JIT manufacturing have led to back-order and out-of-stock conditions for Covid related consumer choices. Many fabricators are continuing to have difficulties buying spot metal to meet customer demand and are paying a significant premium as a result. Most physical metals markets remain tight. Increased freight costs are further impacting fabricator costs.
ESG (Environmental, Social, Governance). Aluminum producers with access to hydroelectric power are eager to push for standards around green aluminum premiums. They believe consumers prefer green products and will be willing to pay a premium for “low carbon” aluminum. Other markets are beginning to shift toward a greener narrative, with the topic arising on multiple occasions at the recent Platts Steel Markets North America Webinar. Meanwhile, China seems poised to address pollution and global warming by setting a cap on aluminum production and pushing green energy initiatives. If China’s efforts come to fruition, ESG will have a much larger impact on metals prices than it has in the past. E.V.’s continue to drive narratives as the push for carbon neutrality globally gains steam which should stand to benefit copper and nickel prices.
Pandemic Disruption. As the US continues to move toward broader reopening, we see the possibility of new pandemic shutdowns as low. However, an unexpected change to this outlook in major economies could bring reduced economic activity. Chile shut its border at the beginning of April which had caused concern in the copper market amid rising case counts. The government will allow imports and exports to continue, however anyone entering or leaving the country will face increased scrutiny which may lead to shipping delays. India and Brazil are also facing an increase in cases, deaths, and hospitalization rates.
Inflation. Higher inflation expectations continue to garner media attention with rising long term interest rates also pointing in that direction. There has been significant asset price appreciation in equities, housing, and commodities over recent months. However, these increases are just starting to materialize across the full spectrum of consumer goods. The Federal Reserve seems content that they can address inflation pressures when needed. On April 19th Coca-Cola announced their intention to raise prices due to higher commodity costs. Proctor & Gamble has announced they will begin to raise prices in September of this year..
Raw Materials/Energy. Energy prices have recovered in earnest and are no longer a drag on base metals pricing. The recovery in oil prices has been from supply cutbacks rather than bullish demand. Natural gas levels for the Winter 21-22 strip are currently around $3.08. Across the country, gasoline prices averaged $2.855 a gallon last week for nationwide, well above summer levels that had dipped below $2.00. Nationwide diesel retail prices are significantly lower from a year ago but have stabilized recently with latest DOE weekly average posting at $3.124/gal.
Tariffs. Section 232’s 25% tariff on steel and 10% tariff on aluminum have remained in place with the new Presidential Administration. Department of Commerce Chair, Giana Raimondo, indicated in a recent speech that “the data show those (Sections 232) tariffs have been effective.” Producers and consumers are lobbying their offsetting position on tariffs with the new administration. As duty unpaid prices increase for imports, the impact of tariff increases on a pure total cost basis.
Raw Material Overstocking. We see a medium to longer term risk of manufacturers overstocking raw materials and inputs. Procurement departments across most industries were hit hard when the economy recovered faster than expected in the summer of 2020. The flurry of restocking continues to cause material supply chain constraints. At some point in the coming future there is a rising risk of overstocking as organizations ensure they do not get caught unprepared in the future, thereby decreasing demand as manufacturers begin to establish new target inventory levels.
AEGIS provides financial hedging strategy and execution for base metals, but also oil, natural gas, refined products, and interest rates.
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