Industrial metals could enjoy another year of elevated yet volatile prices—benefitting large miners but contributing to inflation.

2021 was a very strong year for industrial metals, with the Bloomberg Base Metals Index rising fast and reaching historical highs through mid-October. We expect 2022 to also be favorable, although not on par with last year, and to show more differentiation between metals directly benefitting from energy transition megatrends (copper, nickel and aluminum) and those more tied to plateauing steel production (iron ore, zinc and coking coal), whose prices should reach more “normalized” levels this year.

Our 2022 base case is for industrial metal prices that are moderately lower than 2021 peak levels but still well above historical norms. Volatility should also remain above average, as geopolitical and pandemic-related risks sustain uncertainty over the pace of global economic recovery. Overall, we find reasons for optimism on industrial metals both at macro and micro levels.

At a macro level, global GDP growth should remain robust, with expanding industrial production and infrastructure spending in the U.S. and Europe supporting metal demand. Chinese metal demand should be weaker than last year given economic deceleration, particularly in the real estate sector. Still, China’s supportive policies should prevent a hard landing, while the possible repeat of “dual control” policies to reduce pollution and energy consumption by curbing energy-intensive activities such as steelmaking and aluminum smelting should support prices for metals whose production is being curtailed.

At a micro level, supply and demand dynamics for most metals should remain favorable, although we are more constructive on those whose demand is sustained by the decarbonization megatrends—particularly copper, nickel and aluminum, whose properties are required to build electric vehicles, lighter cars, renewable energy plants and associated infrastructure. Supply of such metals is growing but not as fast as demand due to various constraints, ranging from COVID’s continued impact on labor availability, to logistic and weather-related issues. Additional structural supply-side constraints due to ESG considerations are also emerging, making it harder to get permits to build new mines or expand existing ones. More disciplined capital allocation policies are also making mining companies less proactive than in prior cycles to expand mines or approve new projects, and even when they approve them, they may face unforeseen delays, often due to more complex permitting processes.

These developments are likely to keep the supply/demand balance tight for most industrial metals, and to keep their prices higher for longer, thereby contributing to stickier high inflation. In such an environment, large mining companies would stand to benefit the most.