The divergent futures for metals markets beyond COVID-19

5 October 2021

This article was prepared for our annual Base Metals Summit as part of LME Week 2021. 

We are witnessing a remarkable period for base metals, according to Macquarie’s Commodities Strategy team, with market sentiment recovering from the depths of despair in early 2020, all the way to debate about a new commodities super cycle driven by the rapid deployment of new technology, infrastructure and renewable energy post the pandemic. However, Macquarie strategists believe that the energy transition presents divergent pathways across metals markets, rather than a rising tide that lifts all ships. 

Marcus Garvey, Head of Metals and Bulk Commodities Strategy at Macquarie, explains: “Since April 2020, Aluminium prices have roughly doubled, benefitting from both the dramatic global economic rebound of the past eighteen months, as well as expectations of structural demand strength from rising electric vehicle (EV) sales and the build out of renewable energy projects. At the same time, supply has been constrained recently by acute power shortages and faces the broader challenge of global ambitions to limit energy usage and reduce carbon emissions. For iron ore, however, we describe the experience as something of a rollercoaster, with prices recovering from a Q1 2020 low below $US80/t to a Q2 2021 high above $US230/t, before subsequently crashing back below $US100/t in recent weeks.”

Macquarie suggests these swings in the iron ore price encapsulate elements of the different cyclical phases experienced by industrial metals since the effects of COVID-19 began to ripple through markets last year. As Marcus continues: “The first phase was driven by China’s post lockdown stimulus, delivering a surge in infrastructure and real estate construction, but this plateaued in late 2020 and has experienced a relative decline through 2021. Picking up the baton, however, has been a boom in global goods demand, leading to a near 13 per cent uplift in global manufacturing activity from pre-COVID-19 levels.”

Locked down and unable to spend money in restaurants or movie theatres, while needing to equip themselves to work and be entertained from home, consumers substituted goods for services on a massive scale, explains Marcus: “This was underpinned by fiscal stimulus, most dramatically in the US, where consumer electronics sales through July were almost 50 per cent higher than the equivalent period in 2019. This contributed to tin – a crucial component for soldering electronic components but often overlooked as a relatively small market – delivering the best year-to-date performance of any LME metal.”

The extent to which demand has outstripped supply in numerous markets is still being felt and – exacerbated by supply chain disruptions from recent COVID-19 outbreaks, a global shortage of semiconductors, and tight global power markets – is likely to continue into 2022. According to Marcus, “The need to restock depleted inventories should remain a positive tailwind for raw materials markets. The automotive sector probably provides the most prominent example, where 2021 global production forecasts have been cut by 5 million vehicles - hurting current demand, but likely lifting consumption in 2022.”

Despite these positives, growing concerns around excessive leverage in China’s real estate market and a slowdown in global goods demand growth – as fiscal impulses fade and the US Federal Reserve moves towards tapering their quantitative easing – are threatening a broader pull back in base metal prices. “Separating the influence of these cyclical movements from the structural trends that are likely shape metals demand over the coming decade remains a key challenge”, asserts Marcus.

What’s next?

In this context, Macquarie strategists forecast that rising EV sales will see copper demand from the sector double by 2030 and nickel demand grow up to 20 times current levels. Despite rapid growth rates, however, it remains the case for most metals that the energy transition will gradually take on greater influence over time rather than suddenly becoming a dominant market driver overnight. This influence will not always be positive, however, with lead likely to lose out at the margin, as lithium-ion incrementally replaces lead-acid batteries, and palladium facing the prospect of significant demand destruction as it is used in combustion engine but not electric vehicles.

Nevertheless, for those metals where demand benefits, it raises the obvious question of whether or not supply will be able to progressively keep pace, especially in the cases of nickel, copper and aluminium. For the next two or three years, the Macquarie team believe enough projects have been committed, but there is little room for slippage on their expected ramp-up periods – as seen in aluminium this year – and “further out there is clear potential for structural deficits to emerge”.     

This year we will again host our annual LME Base Metals Summit virtually on 11th October 2021, where the Macquarie Commodity Strategy team and experts from across Macquarie’s commodity business will explore the market themes they expect to dominate the headlines in the year to come, and beyond.