Metal prices surged in 2021 and while they’ve enjoyed continued momentum into the new year, Oxford Economics reckons prices will peak this quarter before gradually pulling back over the year.

Senior economist Stephen Hare said that prices may have some room to go higher over the coming weeks, but “momentum indicators are implying there’s not much left in the rally”.

“We expect robust metal demand again this year as we forecast global industrial production to grow by 4.1%, which is above the 2.8% average between 2000 to 2019,” he said.

“Nonetheless, this is down from the exceptional 7.5% expected growth in 2021.

“Furthermore, the service side of the economy, which is less commodity-intensive, will also grow faster than the production side this year as consumers shift spending patterns as economies continue to open up, relieving demand for metal products.”

Demand will remain strong, but Oxford expects a more robust supply response this year and next.


Headwinds from China’s property sector

Industrial metals – like iron ore, steel and copper – will face headwinds from weakness in China’s property sector this year.

“We expect China’s property downturn to continue in H1 before a recovery in H2 when the impact of policy easing will be felt more significantly through improved housing demand and relieving anxiety over defaults among troubled developers,” Hare said.

“However, the downside risks to our property outlook remain significant, given that more high-profile developers have defaulted on debt, and a pick-up in housing demand is far from certain.

“Additionally, Chinese infrastructure spending is likely to increase, but it is less commodity-intensive than the real estate sector.”

Beijing’s zero tolerance to Covid-19 could also weaken metal demand – but it could also impact supply by disrupting refineries or building congestion at ports.

What’s the Fed got to do with it?

On the monetary front, Oxford forecasts that China’s policymakers will continue to provide “ample” liquidity to the interbank market and robust credit growth in 2022, which is supportive of commodities and has improved confidence and market sentiment.

“Contrary to this, the Fed’s hawkish minutes reinforced the likelihood of four rate hikes this year starting in March,” Hare said.

“The Fed also signalled a reduction in the size of the balance sheet that could start by mid-2022.

“Tighter policy will offset some support for commodities from policy easing in China and has raised the opportunity cost of holding non-yielding assets.

“Consequently, precious metals will trade lower this year,” he added.

More supply expected to come online

On the supply side, it should improve this year since miners experienced a windfall of profits over the last 18 months.

And new supply – particularly copper – is coming online this year after investment when commodity prices were similarly high 10 years ago.

Oxford forecasts Australian iron ore production to rise this year, while Indonesia and the Philippines are increasing nickel production.

And Hare flagged that the nickel price has surged this month, due to increasing optimism over its long-term outlook as EV sales have accelerated while inventories have fallen significantly.

“However, the batteries that are used in EVs comprises only 5% of end use nickel demand and key producers are ramping up production this year,” he said.

And this high price is enabling mothballed nickel capacity to come online, as while metal supply is inelastic in the short run, if prices go high enough, previously uneconomic ores at mothballed or abandoned mines can become profitable.

Inventory levels for all base metals have fallen to low levels, pushing up prices.


Prices should fall by Q2

High energy costs have forced the most energy-intensive metal refiners to scale back production, especially aluminium in China and zinc in Europe, which has pushed prices higher in recent months.

But Oxford says energy prices should fall by spring – or Q2 – and surging coal production in China should alleviate pressure, enabling refining production to resume and for prices to pull back.

While supply constraints due to the high price and availability of freight will persist well into this year, cost pressure will gradually wind down from recent highs as governments and companies address inland logistical issues and port congestion.

But they could spike if supply is disrupted

“We expect this year to be volatile, and prices could quickly rise if supply is disrupted, as we anticipate only slight market surpluses and global inventories are historically low,” Hare said.

He flagged extreme weather events as a risk, with heavy rainfall in Brazil having already disrupted mining operations this year, lifting iron ore prices.

And then there’s civil unrest in key metal producing countries – we’re looking at you Kazakhstan – which is also an upside risk.

“Mining operations in Kazakhstan have been unaffected, but metal prices would likely rise if it is,” Hare said.

“Moreover, mining protests in key copper producers Chile and Peru could also risk disrupting supply.”