Emirates NBD Research
 

Find anything about our articles and more.
Enter a query in the search input above, and results will be displayed as you type.

Try typing "Dubai Economics", "Dubai GDP", "GCC Macro"

Emirates NBD
Search
Subscribe
   
  • Home
  • Economics

    Emirates NBD Research provides detailed coverage of 16 GCC and MENA economies, analysing them from a top down macro and strategic perspective as well as by a bottom up sector by sector approach.

    • SUBTOPICS
    • GCC Macro
    • MENA Macro
    • Global Macro
    • Sector Economics
    • Monthly Insights

     

    Latest Article Dubai PMI: Higher input costs squeeze margins in March
    Latest Article Lebanon outlook
    Latest Article Economic Calendar 29 March

     

  • Markets

    Emirates NBD Research publishes reports on global forex, rates and commodities, as well as regional fixed income and equity markets.

    • SUBTOPICS
    • Foreign Exchange
    • Fixed Income
    • Commodities
    • Equities
    • Monthly Insights

     

    Latest Article Metals markets to benefit from vaccines and stimulus
    Latest Article OPEC surprises again
    Latest Article OPEC to stick to lower output levels

     

  • Daily
  • PMIs

    Emirates NBD sponsors Purchasing Managers’ Indices for the UAE, Saudi Arabia, Egypt and Dubai. The indices are compiled by IHS Markit, the leading global provider of financial market data.

    • SUBTOPICS
    • UAE PMI
    • Saudi Arabia PMI
    • Egypt PMI
    • Dubai PMI
    • Methodology

     

    Latest Article Dubai PMI: Higher input costs squeeze margins in March
    Latest Article UAE PMI improves in March, but global supply constraints are raising input costs
    Latest Article Dubai PMI rose in February

     

  • About Us
  • EmiratesNBD.com
  • Subscribe
COMMODITIES > MARKETS

Outlook for base metals broadly positive

Edward Bell - Senior Director, Market Economics
Published Date: 08 October 2020

Facebook
Linkedin
Twitter
Email
Print

 

Macro conditions for industrial metals had been improving in recent months as economies recovered from sharp drops in activity in Q1-Q2 as a result of the Covid-19 pandemic. Signs of rebounding in industry, a resumption of global trade and accommodative monetary policies have helped commodity prices surge from multi-year (or in some cases record) lows. Our measure of macroeconomic conditions for base metals hit its highest level in August and is holding close to those levels on the preliminary read for September. While the index still correlates with negative year/year performance in the LMEX index of base metal prices, it is nevertheless significantly better than the weak levels hit earlier this year.

Conditions improving for base metal markets

Source: Bloomberg, Emirates NBD Research.

Global manufacturing PMI figures hit 52.3 for September, their highest level since August 2018, with gains coming from both emerging and developed markets. China’s manufacturing PMI numbers, both the official read and the Caixin survey, have held in expansionary territory since at least May as the economy there shows strong signs of rebounding from a weak Q1. Beyond China conditions have been more mixed among major Asian economies but all are still reporting manufacturing figures well above the slump at the start of Q2.

Manufacturing has also been one of the signs of strength among developed markets in recent months even as a rising number of Covid-19 cases has weighed on sentiment and the near-term growth outlook: Germany’s manufacturing PMI spiked to 56.4 in September, well above a year-to-date trough of 34.5 hit back in April while in the US, the ISM manufacturing PMI slipped marginally but at 55.4 in September still represents a strong print. The manufacturing PMI figures globally are positive but as we have noted in the past they represent assessments of month on month changes rather than an indicator that economies are back to or exceeding pre-pandemic levels of output.

Global trade volumes have also begun to show some signs of stabilization. The CPB index of world trade volume has jumped up from its May low and had been managing to grow m/m in June and July (latest data available). The number of container vessels currently underway has also recovered strongly, back to just below pre-pandemic levels as of early Q4 2020. Conditions for global trade should continue to be accommodative going forward as central banks keep policy rates low: lower USD financing costs tend to have a stimulatory effect on global trade, bringing down the cost of trade finance.

Global trade showing signs of rebound

Source: Bloomberg, Emirates NBD Research

Central banks among the major economies have all pledged to keep policy rates on hold well until inflation, growth or employment show signs of returning to sustained higher levels. While policymakers have generally kept policy unchanged over the past few months, preferring to let the extraordinary amounts of stimulus already in markets to do its job, there remains scope for the Federal Reserve in the US, the ECB, the Bank of England as well as for some emerging market central banks to keep adding support, even if it is just a pledge that interest rates are anchored at low levels for a prolonged period.

While this combination of improving manufacturing activity, recovering global trade and low rates can be a potentially powerful cocktail to propel commodity prices higher, they are being counterweighed by the Covid-19 pandemic and governments’ efforts to get control of the virus. Stop/start lockdowns and halts to economic activity, financial market volatility as investors try to price in the trajectory of the virus and changes in consumer/industrial behavior (more remote working, socially distanced workplaces) are all proving to be significant hurdles for higher commodity demand and prices.

We are still broadly optimistic that economies will improve in 2021, at least on base effects alone, and that some economies will be able to converge quite closely to pre-pandemic levels of activity as societies adjust to living with Covid-19. However, an out of control outbreak that pressures health services or policy errors are major risks to this outlook and thus our conviction in a sustained commodity rally for 2021 is less confident than it may otherwise be given the supportive macro factors outlined above.

Aluminium to hold to current levels

Aluminium prices (LME forwards) have rallied more than 20% since hitting a low of USD 1,462/tonne in mid-May. Production ex-China has sunk as prices have fallen below most of the global cost curve and demand tapered off early during the pandemic’s economic fallout. However, widespread closures have been minimal and with prices currently at around USD 1,800/tonne more output shut-ins may be limited. Production in China has continued to push higher this year with the daily run rates back up over 100k tonnes according to IAI data.

Annual change in aluminium production ('000 tonnes)

Source: IAI, Emirates NBD Research

Aluminium inventories have been increasing this year as demand was interrupted by the Covid-19 pandemic. While stockpiles are nowhere near the mountain of metal that markets had to absorb in 2015-16, total LME inventories are still roughly 50% higher as of early October than they were a year ago. Metal inventories in China have normalized after spiking in Q1 as industry went on hold.

The uncertain outlook for the progress of Covid-19, particularly in the US and other developed markets where it had seemed to be under control, poses a major risk to the outlook for industrial demand, and for aluminium in particular. Housing activity has received a boost thanks to low interest rates in nearly all economies but maintaining consumer confidence will be key for rallies to be sustained.

We had an optimistic outlook on aluminium earlier in the year and LME forwards have beaten our price targets. Provided our base case for a return to growth next year and measures help to contain the virus we still expect to see aluminium prices holding up. However, substantial upside from where prices are at the moment may be challenging thanks to further capacity increases from China (a 6.9% increase estimated from Shanghai Metals Market/Bloomberg). We now expect to see aluminum prices at an average of USD 1,750/tonne in 2021 (USD 1,730/tonne previously).

The aluminium market also remains at the centre of the current US administration’s aggressive trade policies. Should Donald Trump win November’s presidential election we would expect tariffs on metal to remain a tool in the administration’s playbook when negotiating trade deals. But a Biden victory may not mean an end or reversal of tariffs either. Biden has not outlined in specific detail a view on metals tariffs but we do not expect a complete reversal of the current level of tariffs. An eventual rollback of some of the aluminium market tariffs, particularly on key trade partners of the US such as Canada is likely but we would likely wait until further along during a Biden presidency.

Positive outlook for copper intact

Copper prices have recorded the strongest rally among the base metal complex, up over 44% as of early October at USD 6,679/tonne compared with USD 4,630/tonne hit in early March. We had positive expectations for copper in our Q3 metals outlook and they have largely played out. Anxiety over supply in major producers thanks to Covid-19 affecting Peru and Chile considerably has helped to push prices higher, even as miners have learned to live with the virus and run operations on reduced staff. But that dynamic itself has prompted one of the perennial issues with copper supply; labour disputes. Several major mines in Chile are in the process of mediation with strikes a potential near term threat to supply.

Copper inventories have also narrowed compared with a burdensome position in H1. Both LME and SHFE inventories have narrowed in recent months, helping to contribute to a tightening of forward structures in copper: LME cash-3mth spreads moved into backwardation of as much as US 40/tonne in mid-September. They have since moved back into contango in line with several large single-day deliveries into LME warehouses. We maintain our view for a gradual rise in copper prices for 2021 to an average of USD 6,612/tonne.

Copper structures have improved

Source: Bloomberg, Emirates NBD Research

Emirates NBD Research base metals price assumptions

Source: Bloomberg, Emirates NBD Research. Note: USD/tonne, average of period.

Written By:
Edward Bell, Senior Director, Market Economics

RELATED ARTICLES

Metals markets to benefit from vaccines and stimulus
05.04.2021

OPEC surprises again
04.04.2021

OPEC to stick to lower output levels
31.03.2021

OPEC and allies to keep oil market hot
07.03.2021

Oil at 100: No.
02.03.2021

See all

LATEST ARTICLES

Dubai PMI: Higher input costs squeeze margins in March
11.04.2021

Lebanon outlook
08.04.2021

Morocco outlook
08.04.2021

See all
 

 Subscribe to our newsletter


Never miss out what is going on in UAE Economics

KEEP READING MORE

PMIs: UAE reading disappoints

The UAE headline PMI slipped below the neutral 50 level in October, for the second time in three months, declining to 49.5 from 51.0 in September.

ECONOMICS, PMIS - 03.11.2020

Dollar weakness remains entrenched

Politics, coronavirus and growth all weigh against the dollar in 2021.

MARKETS, FX - 07.01.2021

MENA Quarterly Q3 2020

Our regional MENA roundup for the third quarter

ECONOMICS, MENA MACRO - 19.07.2020

 

CBE keeps rates on hold

The Central Bank of Egypt kept its benchmark overnight deposit rate on hold at 8.25% at its February 4 meeting.

ECONOMICS, EGYPT - 07.02.2021

GCC budget deficits to remain substantial even as economic outlook improves

Oil price will remain below GCC budget break evens in 2021 and sovereigns will need to issue more debt to finance budget shortfalls.

ECONOMICS, GCC MACRO - 17.02.2021

OPEC and allies to keep oil market hot

We now expect oil balances to be tighter and prices to be higher

MARKETS, COMMODITIES - 07.03.2021

Monthly Insights - November 2020

Our final Monthly Insights publication of 2020, looking at the latest developments and trends in global and regional economics and markets.

ECONOMICS, MONTHLY INSIGHTS - 25.11.2020

  • Economics
  • Markets
  • PMIs
  • About Us
  • Subscribe to our publications
  • Economics
  • GCC Macro
  • MENA Macro
  • Global Macro
  • Sector Economics
  • Markets
  • Foreign Exchange
  • Fixed Income
  • Commodities
  • Equities
  • PMIs
  • UAE PMI
  • Saudi Arabia PMI
  • Egypt PMI
  • Dubai Economy Tracker
  • Methodology
  • About Us
  • Subscribe to our publications

 


Terms and Conditions
Copyright © 2021 Emirates NBD Bank PJSC. All Rights Reserved