Ratings agency Moody’s Investors Service says the Covid-19 pandemic has caused significant deterioration in economic indicators and global growth forecasts, while hurting base metals demand.
The agency says purchasing managers’ indexes (PMIs) in May remained in a severe contraction, with the US at 43.1; the Eurozone at 39 – but up from 13.5 in April; Brazil at 38.3; and China at 50.6 - after having dropped to a low of 35.7 in February.
However, improving demand in China for base metals is an important factor in market views and prices climbing from March lows.
Moody’s notes that base metals prices were lower since early January on declining economic forecasts.
China accounts for at least 50% or more of the global consumption of aluminium, copper and nickel, and about 48% for zinc.
With manufacturing and industrial activity opening in China faster than elsewhere, base metals prices have increased from March lows.
However, further substantial increases are unlikely with inventories up and production curtailments insufficient to overcome lost demand, Moody's notes.
“Our price sensitivity ranges have been revised to reflect each metal's position and demand expectations. With the exception of copper, we adjusted price sensitivities to better match likely market conditions in 2020 and 2021, reflecting the surpluses from lower demand and what is likely to be a slow recovery.
“Industry faces numerous ongoing and future challenges. These include the need to invest in new mines; rising political and resource nationalism and environmental risks; and managing operations after the coronavirus,” the agency states.
Moody’s would consider changing the outlook to stable for base metals if PMIs in the US, Europe and China track between 50 and 55 for at least two consecutive months, it says. However, a change is unlikely until Covid-19 is controlled.
US gross domestic product (GDP) growth is expected to be negative 5.7% this year, while greater deterioration is expected in the euro area at negative 8.5%, with China at 1%.
“The impact in the second quarter from lockdowns is greater than previously anticipated and while a gradual recovery is expected to begin in the second half of 2020, the recovery of global economies will be prolonged and uneven,” says Moody’s.
The agency further explains that the rapid and widening spread of the Covid-19 outbreak, deteriorating global economic outlook, falling oil prices and asset price declines created a severe and extensive credit shock across many sectors, regions and markets.
The combined credit effects of these developments are unprecedented. The base metal markets will be affected by the shock, given the sensitivity to demand levels across a number of end markets, most of which are, in turn, sensitive to consumer demand.
Meanwhile, since manufacturing and industrial activity has picked up in China earlier than elsewhere in the world, the sentiment around market demand for base metals has improved.
Prices and sentiment have also responded to support packages by governments in developed countries; supply disruptions, particularly in copper and zinc, caused by lockdowns by governments in various countries and regions within countries; and mine specific operational issues.
However, London Metal Exchange (LME) inventories have climbed, zinc more modestly than others. That is likely to also limit potential upward price moves, notes Moody’s.
Ultimately, the agency says that each metal will follow a different recovery path.
Aluminium, although it serves a number of end markets, is weighted to aerospace, transportation and construction, which have slow recovery prospects. Packaging and cans are holding up better.
“The reduced demand for aluminium and increased capacity in China will widen the deficit for aluminium in 2020 and we see the run-up in prices since the lows seen in March as peaking,” Moody’s points out.
Copper has a similar end market profile to aluminium, supplying markets such as equipment, building and construction, infrastructure, transportation and industrial, and will remain vulnerable.
Refined copper moved into surplus in the first two months of this year and is likely to remain there, despite production curtailments that began in March, although this could moderate over the course of the year.
As a leading indicator, copper will benefit from improving industrial production and GDP trends with time.
Over the medium to long term, copper is expected to be in deficit, says Moody’s. Declining ore grades, project delays and the suspension of construction projects in countries such as Chile, exacerbated by Covid-19, will make it harder for producers to maintain let alone expand production volumes to meet recovery in demand levels and new demand from increasing production of battery electric vehicles and related infrastructure requirements.
Nickel's performance will continue to be driven by stainless steel production, which accounts for about 70% of total nickel demand, and in China, which accounts for 54% of global demand.
Supply disruptions in countries such as the Philippines and Canada, together with Indonesia’s nickel ore export ban implemented in January, have reduced production expectations for this year; however, the greater fall-off in demand for stainless steel is likely to move the market into surplus and LME inventories have been increasing.
Significant deterioration in markets globally, such as aerospace, automotive, general industrial and manufacturing, including appliances, together with uneven recoveries in global economies, as countries are at different phases with respect to dealing with the pandemic, will be key drivers with respect to nickel demand.
Over the medium to longer term, nickel demand will benefit from the continued development of and roll-out of battery electric vehicles.
Moody’s states that zinc prices will remain under pressure, owing to a large percentage of demand coming from the steel industry, which, in turn, supplies a number of the industries that are facing substantial demand loss and disruption.
“The current market imbalance and more negative market sentiment since the virus outbreak hurt zinc prices more than other base metals. Year-to-date zinc prices averaged $0.93/lb as of mid-June, a 23.5% drop from the same period in 2019.
“In the first quarter, refined zinc moved to a surplus of close to 8% from a balanced supply/demand situation in the first quarter of 2019, as a result of a 3% increase in metal production and a 4% decline in demand, tied to the effects from the Covid-19 outbreak in China.”
Moody’s explains that while it expects the current low prices to result in some high-cost mines stopping production, and the recent lockdowns in many countries to temporarily reduce production, zinc prices in the next 12 to 18 months will be highly dependent on demand recovery, which will, at best, be gradual.
The extent and pace of demand recovery will largely depend on stimulus measures in China, in particular to support construction activities and the automotive industry.