Commodities - FEBRUARY 23, 2017

Metal prices on the rise

by Jody Barhanovich

Metals prices surged by 10 percent during the fourth quarter 2016, according to World Bank’s January 2017 Commodity Markets Outlook quarterly report. The run-up in prices marked the third consecutive quarterly gain for metals.

However, average annual metal prices were 6 percent less than 2015, the lowest level in 11 years. Prices of most metals were driven higher by strong demand — led by credit stimulus in China — as well as supply constraints and falling stocks. China’s share of world metal consumption surpassed 50 percent in 2015 and the country has accounted for the bulk of global growth the past 15 years. China’s transition to a consumption-led economy, along with industrial reform and environmental concerns, is expected to slow growth in demand for raw materials.

Prices also received a boost following the U.S. election on expectations of higher infrastructure investment and increased optimism for the global economy. Strong investor demand in China in November also pushed metal prices upward.

The metal markets continue to rebalance due to slowing investments, mine closures, environmental constraints and policy developments. Global supplies continue to expand from earlier investment and high prices, which are relieving pressures on companies to reduce marginal supply.

Breaking it down by individual metals, iron prices increased 20 percent, up for a fourth consecutive quarter, while lead prices increased 14 percent, boosted by a spike in Chinese investor demand that was disproportionately geared toward lead. Tin prices rose 12 percent, up a fourth straight quarter, with prices in December more than 50 percent higher than last January’s low. Zinc prices rose 12 percent, also up for the fourth straight quarter, while copper prices jumped 10 percent, the first double-digit quarterly gain in nearly five years. Aluminum prices rose 6 percent and nickel prices rose 5 percent on strong stainless steel demand in China.

Metals prices are projected to increase by 11 percent in 2017 due to tightening markets for most metals, especially those facing imminent resource constraints, according to the World Bank report. The largest gains are expected in zinc (27 percent) and lead (18 percent) due to mine supply constraints brought on by permanent and discretionary closures. Double-digit gains are also expected for copper, nickel and tin.

Upside risks to prices include stronger global demand, slower ramp-up of new capacity, tighter environmental constraints and policy action that limits supply. Downside risks include slower demand in China and higher-than-expected production, including the re-starting of idled capacity.

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