What trends in the global commodity market are expected after the COVID-19 pandemic? Agricultural commodity prices have shot up due to climate change and global conflicts. Energy prices are soaring in the US, Europe, and the EU, due to the ripple effect of the Ukraine conflict. Fertilizer prices have almost doubled, thus escalating agricultural input costs.
Metal commodities are, however, looking bullish again, on the back of resurging economic growth, especially in China. Metal commodities have generally been some of the best performing in the last ten years, according to data from the IMF, as seen in the image below.
According to the 2020 and 2021 UNCTAD minerals, ores, and metals price index annual reports, prices of base metals were relatively stable. Price peaks were witnessed in Q2 of 2021 on the back of bullish production and soaring demand from China, although Q4 saw a price stabilization (as seen in the infographic below).
While the US economy is expected to contract, metal commodities have generally been performing well, thanks to ramped-up industrial production. However, global commodities markets are still volatile due to supply chain issues, tensions in the South China Sea, and the ongoing war in Ukraine.
Metal commodities traders, such as aluminum powder suppliers, managers, or market speculators, should study the trends in the global commodity industry. This will provide a benchmark for price-hedging, stocking of goods, and anticipation of any other future shocks. The three points discussed below are a good place to start.
China is driving growth
China is a bull in the global metal commodities trade, accounting for over half of the global demand. China’s economic surge since the economic restructuring of the 1980s has led to this dramatic price shift in metal commodities. The construction sector has boomed, with copper, aluminum, zinc, tin, and iron ore prices almost tripling between 2001 and 2006.
While China is one of the world’s largest producers of base metals, such as aluminum and nickel, local demand has far exceeded supply. As a result, much of China’s production capacity is for the domestic market.
China has also contributed the largest increase in global refining capacity. China holds about 35-55% of all global base metals. With only 3% of the world’s bauxite, China commands the lead in the aluminum refinery, at about 55% of global production. Despite the increase in refining capacity, Chinese supply can barely keep up with domestic demand.
The Chinese government is moving from more of an output-led economic model to a local consumer-centric model. This means prices of metals used in consumer goods, such as aluminum, zinc, tin, and alloys, may increase, while prices of industrial metals, such as copper and iron, may reduce.
While prices for metal commodities have stabilized post-COVID, the market is expected to not resurge to its usual. This is due to the volatility in the world’s major economies, reduced demand from Europe and the US, reduced output from other major producers, such as Australia and Indonesia, and reduced demand from China. You can refer to the infographic below for the performance of China’s base metals futures.
Image Source: https://fingfx.thomsonreuters.com/gfx/ce/yxmvjqqdypr/Base%20metals%202021.JPG
In particular, China is implementing a more environmentally friendly approach to final production, for example, by encouraging the reuse of scrap metal. However, prices of iron ore, refined to manufacture steel, aluminum, and zinc, are expected to remain stable, at least in the short term, thanks to increased global factory activity.
New technologies are emerging
Technological innovation is one of the most critical trends in the global commodity industry. Metal mining has traditionally been geared toward industries such as construction and manufacturing. Think iron and steel for building frames and concrete reinforcement, aluminum for industrial manufacturing, and copper, tin, tungsten, and zinc for consumer electrical products, such as transmission wires and cables.
However, new products are starting to emerge in the market. For example, electric vehicles (EVs) are becoming more common globally. There are also peculiar construction projects, such as Maglev trains in China and Japan (shown below) and the CERN project in Europe, which require more non-traditional metal types.
Due to these and many other technological innovations, we are seeing a general downward trend in demand for traditional base metals and ores, such as iron and aluminum.
As a metal commodities trader, you should know the general downward trend in mining production for traditional base metals. But on the other hand, we can expect a rise in the prices of these non-traditional metals, such as nickel and tungsten. Moreover, the transition to green energy for EVs may also increase the demand for these non-traditional metals.
Something to also keep in mind is the technological innovation in mining, which reduces overall ore mining costs. The effects of this on commodity markets may be a reduction in metal prices in the long term.
Focus on environmental regulations
Environmental regulations mean that countries are looking toward a cleaner mining footprint while at the same time maintaining output. This may imply a bigger focus on reusing scrap metal, thus decreasing the production of iron ore and bauxite. That may result in a price increase in metals.
It may also mean that countries such as China will start to encourage using renewable energy in their production as opposed to coal. On the one hand, high-quality Australian coal is much more expensive than Chinese coal, which may drive up production costs in countries such as Indonesia and the Philippines, which are also major ore producers. This may cause an increase in prices over the medium-to-short term.
On the other hand, using renewable energy in factory production may still be quite a long way off since this is relatively expensive. Thus, it isn’t expected that renewable energy in the metal commodities market will have a significant impact on short-term prices.
Summing up
The global commodities market has been volatile since the pandemic. Base metal prices are generally more stable than other commodities. The resurgence of economic activity and an upsurge in Chinese production is expected to stabilize prices. Global tensions in the South China Sea and the Ukraine conflict may cause short-term shocks.
Technological innovations such as better production methods may cause a slight decrease in base metal prices but only in the medium to long-term. New technologies that place a demand on alternative metals, such as tungsten, may cause an increase in demand for these metals and thus lead to a positive price shift. On the other hand, environmental regulations are expected to change production methods or cause a preference for scrap reuse. Market trends show a fall in prices over the mid-to-long term.
Commodities traders may need to build resilience in their supply chain due to rising geopolitical tensions and reduced global output from China. This may include exploring alternative logistics channels. Traders in Exchange-Traded Funds (ETFs) on metal commodities may need to explore these trends in the global commodity industry over the next year or so before fully committing to a futures trade.
