The strength of metals prices is enduring in spite of China’s decelerating growth and its recent attempts to cool off prices. This is due not only to favorable supply-demand fundamentals, but also to China’s drive to fight pollution by curtailing energy-intensive mining and steelmaking activities.
Through mid-September, metals prices have reached new peaks, with the Bloomberg Base Metals Index in a continuous upwards trend since the lows of March 2020. China’s slowing growth, the recent release of strategic reserves of copper, aluminum and zinc at discounted prices, and local authorities’ threat of severe penalties against speculators have not been enough to cool metals prices;. healthy global supply-demand fundamental dynamics have proven a far more powerful counter-weight.
Metals supply is not rising as fast as demand, with COVID-19 related disruption at several mining operations and projects being a key constraining factor. Another key issue on the supply side is Chinese environmental policies to fight pollution, which are starting to have a much stronger impact in supporting metal prices relative to simultaneous Chinese policies to fight commodity-fueled inflation.
Indeed, in the last few months, China’s authorities have stepped up pressure on domestic steelmakers and aluminum smelters to reduce output, in order to control pollution and limit energy consumption. As China is the largest global producer of both steel and aluminum, evidence of local production curbs occurring at a time of strong global demand has sent steel and aluminum prices to new highs. The only notable side effect of curbing Chinese steel output has been on iron ore prices, which started to decline during the summer, given that iron ore is a key ingredient for steelmaking and China’s demand accounts for about 70% of global iron ore production, needed to feed its large steel industry.
Looking ahead, metals prices will likely continue to be driven by market forces, with China exerting influence on supply/demand dynamics (and ultimately prices) due to the magnitude of its metal consumption and production. As environmental policies in China gain more traction, like elsewhere, we should see metals prices be supported by further supply curbs of most polluting and energy-intensive activities like steelmaking, aluminum smelting and coal mining, and rising demand for battery-grade metals such as copper, aluminum and nickel, which stand to benefit most from ongoing decarbonization megatrends. In our view, “higher prices for longer” should ultimately benefit the largest investment grade mining and steel companies.