TL;DR

Industrial metal prices decelerated in February and while some price levels remain elevated in a historical sense, the rate of change in prices cooled and slowed dramatically.

So, what went down (or didn’t go down) in February and what’s the outlook for March and project decision-making?

Are base metals returning to trend, or will China’s slowdown and low rate of personal consumption mean its new base metals opiate will sit on China’s increasingly coal-fired airconditioned shelves for a little longer - regardless of falling copper inventories?

As usual, it’s a China consumption story, and here are some thoughts.

Bulks

This is predominantly a continuing downtrend story other than for thermal coal.

The 8% rate of deceleration in the spot price index in February was emphatic, with bulks as a whole still in what looks like a cyclical decline.

Iron ore juggernauts have cut dividends on expectation of continuing weakness, whether they say it or not. And China’s recent 5ish % growth forecast last week cements this idea.

Thermal coal is buoyant and way stronger than steel-making coking coal prices which have halved since their highs last year.

We now know that China is super-sizing its coal-fired electricity production capacity, with well over 100 large scale power stations (over 100 GW) approved/permitted last year.

This represents strong levels of continuing thermal coal demand as China embarks on a future of competing with Japan, Korea and others for Australian and Indonesian thermal coal. So much for climate change response.

But the focus now is to keep the population happy (and cool) and not necessarily super charge property construction for investors. Clearly, Xi has a few new priorities since the lockdown revolts of last year.

The ‘feel’ seems to be more softening in coking coal for steelmaking headed into a still flagging real estate sector, versus higher thermal coal prices for electricity and energy security in the absence of energy storage capacity and a slow transition.

Bases

Bases are a very different story.

In terms of the base metals price trend over the 15 months to March 2022 - we witnessed price accelerations for 4 months, and each time that was followed by one month of price deceleration, almost like a cyclical exhaustion/reset.

There were three of these mini cycles as indicated below.

Then in April 2022, the trend flipped to 4 decelerations in a row before a peak in the 5th month.

Chinese consumers were not spending. They were saving as they have always done - noting that around 38% of China GDP comes from consumption, whereas it’s closer to 68% in the U.S.

And then since October, the trend appears to have reverted back to the 4 months up/1 month down mini cycle.

Did February signal a return to the mini-trend, or might there be more red columns to come?

But first, why the change in March/April 2022?

I think it had to do with a stronger USD against the Aussie as much as it had to do with the February 2022 invasion of Ukraine and China’s low rates of consumer spending (as a % of GDP) while large percentages of the population were in lockdown.

Also, U.S. interest rate lift-off started on March 18, 2022, and the USD started to strengthen. As we know, a strong USD is not positive for commodity prices and in April we started to see that play out and become entrenched in commodity price decelerations.

By September 2022, the federal funds rate in the U.S. was in a range of 1.5% to 1.75%. Not high, but still a very rapid rise from a decade-low base.

And while the financialised market (bonds and equities) did not believe the Fed would/could go hard and long on rates (i.e., didn’t believe Powell could get his Volcker on), the real economy was still making important decisions in relation to land, labour and capital.

And many of those decisions were influenced by a stronger USD against almost all currencies (except for bitcoin) and higher cost of capital (and commodities), and as a result higher commodity prices started to cure higher commodity prices.

Some projects were abandoned or stalled, and demand fell towards (constrained) supply.

This is evidenced by the red bars in the chart above (April to July) - a deceleration mini cycle.

But from October 2022 base metal prices seem to have reverted to the 4 up/1 down pattern. Or have they?

With base metals promising to grow due to the multi-decade green transition secular - will they return to trend, or is there potential for further stalling if China’s population continues to save instead of spend, despite copper inventories being at historic lows?

And will certain miners be holding off or leaning into new base projects - and will the bears be rewarded with a pullback in prices and a cheaper entry price into bases, at a later date?

Will tailwinds win over base metal price headwinds?

The almost pedestrian price accelerations in October 2022 to January 2023 seem to be associated with the overdone China re-opening narrative and the false ‘end of dollar dominance’ narrative that was present at the time.

The country did not shut down entirely and did not stop all construction. The market misjudged this and was caught off guard. However, domestic consumption was curtailed. Strike 1.

And because financial markets did not believe the Fed would go harder for longer, markets were expecting a weaker dollar which is net positive for commodities. But that didn’t happen either. Strike 2.

So, as metal prices have been decelerating despite low copper inventories and the USD has been strengthening against almost all currencies, there is more volatility to come.

Here’s a non-exhaustive checklist of headwinds and tailwinds that will likely buffet base metal prices in March.

(+ve Demand) Reduced/low copper inventories.
(-ve Demand) Front running of China’s recently released 5ish % annual GDP growth rate, meaning any massive increase in already low personal consumption (just under 40% of GDP) is unlikely.
(-ve Demand) No doubling down in industrial production/demand as China business was never fully shutdown.
(Bulks to bases switching) China’s Common Prosperity policy not being conducive to a ‘build it and they will come’ construction impetus and more focused on social goods and services, consumption, wellness and inclusion with a refocus away from building millions of investment properties.
(-ve Demand) A restrengthening in the U.S. dollar against the Aussie and most other currencies (negative for commodities) as financial markets finally hear Powell’s hawk and factor in sticky wage and services inflation and in response, higher interest rates/cost of capital for longer. There are now calls for a 50-basis point rise by the U.S. Fed on March 22. 50 versus 25 is anyone’s guess and will be data dependent.
(+ve Supply) More mines at full strength, including in countries (like Brazil) where COVID lockdowns and environmental actions have had long term negative effects.
(-ve Supply) On the other hand, cost push pressures on wages, oil/gas prices and other input costs for less new mines and expansions, plus shutdowns in Peru and Freeport (copper) in Indonesia.