Metals markets to benefit from vaccines and stimulus

Edward Bell - Senior Director, Market Economics
Published Date: 05 April 2021


The Biden administration’s target of a USD 2.25trn infrastructure package could set a fire under industrial metals markets that are already coming out of the Covid-19 pandemic with some tailwinds. Spending on roadworks, railways and green infrastructure will all need extensive capital inputs with metals like copper and aluminium likely to be in high demand. While the so-called American Jobs Plan is only at its initial stages and may face some pushback from conservative politicians in the US against any social spending elements, hard infrastructure spending is likely to get across the line in some form, even if Democrats need to make use of the budget reconciliation tool in the next fiscal year. Combined with persistent demand in markets like China and India, an American government spending heavily on infrastructure sets up a compelling medium-term outlook for industrial metals.

Near-term dynamics for industrial metals remain positive as assessed by our Base Metals Conditions index. The index rose to a level of 65 for February and a preliminary assessment for March has it rising to a strong 77, which if confirmed when full data for the month is available would represent the strongest read since mid-2017.

Fundamentals for metals markets on the rise

Source: Bloomberg, Emirates NBD Research

Persistent year-on-year improvements in manufacturing conditions, flattered by the low base effects of H1 2020 when the Covid-19 pandemic took hold of the global economy, are helping to support the turnaround in industrial metals. The global manufacturing PMI at 53.9 for February 2021 is well above pre-pandemic levels and reflects improvements across China and India as well as developed markets such as the US and Germany.

Dollar hasn't been a drag

While the stronger dollar seen since January would normally be a negative across commodity assets, it has so far not stood in the way of strong year-to-date (ytd) performance across key metals in the base metals complex. Copper has risen more than 13% ytd, although at around USD 8,800/tonne it has pulled back considerably from levels of more than USD 9,000/tonne recorded earlier in the year. Nickel had been the standout metal for much of the first quarter, having risen to nearly 20% ytd gains as of late February before a major Chinese producer announced plans that would allow nickel pig iron to be processed into battery intermediate products, rending into the argument for nickel supply shortages.

LME aluminium forwards have gained about 12% ytd and pushed above USD 2,200/tonne, although prices have come off their ytd highs of nearly USD 2,300/tonne in anticipation of more supply coming into the market this year in search of the higher prices. The sharp drop into backwardation of around USD 35/tonne on spot-3mth spreads has also softened a little on the same dynamics.

LME aluminium performance: 1yr

Source: Bloomberg, Emirates NBD Research

Aluminium inventories also haven’t shown the same downward pull that copper or tin stocks recorded for much of the past year. LME stocks had only trended marginally lower until early March when a few sizeable deliveries pushed inventories up to their highest level since 2017. Likewise, inventories linked to the SHFE have also been trending higher in recent weeks.

LME aluminium inventories

Source: Bloomberg, Emirates NBD Research

Nevertheless, the medium-term outlook for aluminium is growing more positive. China’s efforts to decarbonize its economy—aiming for carbon neutrality by 2060—will see some of the heavier polluting smelters face restrictions, potentially capping the seemingly unending capacity growth. A Chinese government body in control of strategic materials reserves is reportedly considering whether to sell some of its inventories to cool down prices and prevent a rapid increase in production, and consequent emissions this year. While a near-term negative, chipping away at near-term profitable conditions for Chinese smelters and potential for more capacity additions could help to set prices up for sustaining current levels over the next few years.

The USD 2.25trn American Jobs Plan also notionally includes many projects that would draw in metals inputs, including aluminium. A focus on transportation and green infrastructure, particularly grid infrastructure, would draw in use of the light metal. While we would expect to see political fights around the details of any spending plans, including how they will be paid for, the administration has shown its willingness to bypass bipartisan policymaking in pursuit of policy objectives and could set the scene for strong domestic aluminium consumption going forward.

Upgrading our metals outlook

We are moderately raising our aluminium forecasts and expect prices to hold close to current levels for much of the rest of 2021 before a modest pull back in 2022 on supply responses and slower aggregate global growth.

Like aluminium, copper will stand to benefit from a US economy boosted by heavy infrastructure spending, should it indeed materialize. However, copper also has a weaker supply profile over this year and next, helping to build a strong bullish case for the metal. Copper inventories are also tight which could leave the market squeezed by the end of this year if consumption takes off on the back of eased Covid-19 restrictions. We are bringing forward our case for copper strength to earlier in the year and now expect prices to average around USD 8,400/tonne this year.

Emirates NBD Research base metals assumptions

Source: Bloomberg, Emirates NBD Reseach.