For a while, commodities did respond, pushing higher through May. However, in the second half of the year, the asset class fell apart to end the year sharply lower.
Base metal vulnerability
In the base metals space, zinc suffered the biggest decline within the London Metal Exchange (LME) group, off some 26 percent. Aluminum, lead
If our thesis of a gradually spreading global slowdown is correct, commodity rallies likely will be vulnerable in 2019. With base metals, we continue to see low inventories, smelting bottlenecks, modest supply
Given that the bulk of global nonferrous demand (50 percent to 60 percent) comes from China, prices are singularly dependent on what goes on with that country’s economy. As China slows and as
We also think that base metals will be a growing casualty of the U.S.-China trade war—one that will remain messy, protracted and an overall negative for metals demand.
We also think that base metals will be a growing casualty of the U.S.-China trade war—one that will remain messy, protracted and an overall negative for metals demand. However, any downward price swing will not approach the 2015-2016 lows, as back then as we were swimming in stocks, and the selling of excess inventories only exaggerated the price declines.
Copper reality check
Copper traded roughly within a $600-per-ton range between early December to mid-January, with prices fluctuating between $5,725 and $6,352. Values came within $75 of hitting our 2019 forecast low of $5,650 Jan. 3, but we have recovered slightly since then.
No doubt, the more optimistic tone generated by the U.S.-Chinese trade talks in early January have helped stabilize copper of late, though growing macro weakness in China likely will keep a more significant rally in check. (Trade talks between the two countries resumed again in mid- February, with the U.S. and China attempting to reach a deal before March 1.)
To wit, the latest Chinese Purchasing Managers’ Index (PMI) numbers (both the official and private readings) for December 2018 have dipped into contraction territory for the first time in years. We should note that these readings correlate quite significantly with copper prices, perhaps better than almost any other indicator we have seen. Meanwhile, the latest numbers from the International Copper Study Group (ICSG), Lisbon, Portugal, has the global refined copper market in a 595,000-ton deficit through September of last year compared with a 226,000-ton deficit in the same period a year earlier. We find the ICSG has it once the year is complete.
In other key developments, Chile’s copper production recovered nicely in 2018, increasing 6 percent year to date through November 2018. Given that China has been reducing its scrap imports considerably for much of the past two years, we suspect that Chilean refined units will find a ready home going into China as a substitute material for scrap, and so the increase in Chilean production should readily be absorbed. (We should note that the scrap that China is importing is higher quality, so the country is still getting relatively high copper content). China imported 4.87 million tons of unwrought copper in the first 11 months of 2018, an increase of 14.9 percent from a year earlier. Imports of ores and concentrates reached 18.25 million tons year to date through November 2018, up 16.4 percent year over year.
In terms of price, we put out a $5,650 to $7,220 per ton 2019 forecast range in our LME outlook report for copper, but we likely would shave that range by $100 per ton on either side in view of the global macro slowdown we suspect will accelerate over the course of 2019.