Several uncertainties that upset the global metals market covering precious, industrial and base metals last year have more or less settled down and given way to a sense of cautious optimism at the start of this year. Importantly, growth seems to be gradually returning to trend. The positive correlation between economic growth and industrially-oriented metals consumption is, of course, well known.

Contrary to apprehensions of a slowdown, Chinese import and consumption has been surprisingly healthy in recent months. As the mover and shaker of the global metals market, developments in China have a profound impact on the market. If the demand side has appeared healthy, across base metals, the supply side too is fairly large. In other words, what remains to be seen is whether supplies will chase demand or vice-versa.

It is in this context that one must examine what’s in store for the metals market this year. In addition to demand and supply dynamics, some of the key themes for metals for the year include investment, production costs, monetary policies, environmental issues and trade policies of governments. Many lead indicators including the OECD composite leading indicators point to the emergence of ‘green shoots’. In terms of economic growth, unlike in the previous two years, developed world has entered 2014 on a positive note, under the lead of the US. Added to this is China’s continuing appetite for metals. In an unusual way, core buyers (western world) and emerging market buyers have combined to propel demand higher in 2014, observed an analyst.

Demand growth In other words, on current reckoning and subject to normal market conditions, demand is not going to be an issue this year. A reasonably stable demand growth is set to combine with slowing mine supply growth. Many Greenfield and Brown-field projects were postponed in 2012-2013. Yet, many projects that had already made significant progress have come on stream, accelerating supply growth. No wonder, inventories are at elevated levels on the back of muted demand during major part of last year. Additionally mines are focusing on productivity improvement and cost reduction, which should improve supplies and competitiveness.

An environment of stable demand growth combined with widespread expectation of slowing mine supply growth provides a better fundamental outlook for metals this year. Government policies will play an important role in impacting metals trade worldwide. Indonesian government’s proposed ban on export of unprocessed ore and the Union Government’s ongoing restrictions on gold imports are two glaring examples.

Also, environmental issues are sure to come to the fore. In China, pollution is forcing heavy industries to shift out of densely populated areas. Additionally, State-owned enterprises in China face possible reforms in terms of lower subsidies, improved functional efficiency and so on. If investment in new capacities is curbed, it will improve the margins for the existing units.

Now that QE tapering is a reality and asset purchases in the US may be phased out in the months ahead, liquidity will reduce to that extent even as the dollar is widely expected to become stronger. In the event, metals prices will be pressured down. But the flip side is that decision to begin tapering also sends out a positive signal about the state of the US economy, which means improved industrial activity is likely to drive demand higher.

Last but not the least, with new LME rules kicking in from April 1, warehouse queues may shorten, and premiums may fall. To be sure, base metals premiums gained in 2013 due to inadequacies in warehousing and delivery mechanism that drove premiums higher. In sum, as the base metals market will be largely supply driven, price volatility can be expected to be lower. However, in the first half, the market is likely to face headwinds with large supplies which are likely to ease in the second half. While this is the general theme for the base metals complex, price performance will surely depend on the market fundamentals of individual metals. Precious metals will diverge further. With economic upswing, platinum prices will be decoupled from gold; and the price differential between the two metals may widen beyond the current $180 an ounce, with gold poised to fall below $1,200/oz.

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