Base metals 2022 outlook: Bears may come out of hibernation

The year 2021 was robust for the base metals complex. After surging in 2020, metal prices continued to rise in 2021 as well.

The Bloomberg Base Metal Spot Price Index surged 32.8 per cent in 2021 after witnessing a 19 per cent rally in 2020, closing at 278.83 for the year 2021.

Among the metals, Aluminium outperformed others by rising about 42 per cent last year. The Aluminium 3-month rolling forwards contract on the London Metal Exchange (LME) rose from $1,979.50 per tonne in 2020 to close the year 2021 at $2,807.5, up 41.83 per cent.

Zinc, Copper and Nickel prices on the LME were up 28.46 per cent, 25.17 per cent and 24.94 per cent respectively. LME Lead prices rose by 15.55 per cent, underperforming peers for the second consecutive year.

Supply disruptions due to locked shipments and energy crisis in China in the second half of 2021 were the major factors that drove metal prices higher. Coupled with this, increased demand on the back of the easy money from stimulus measures of global central banks also supported metal prices in 2021.

Will the rally continue in 2022? Both fundamental and technical factors point otherwise. Here’s more:

Cooling global growth

The global economy has recovered well after having hit a trough in 2020 on the back of the coronavirus outbreak. However, the growth across key geographies is likely to slow down in 2022 as compared to 2021. The International Monetary Fund (IMF) projects the global economy to grow at a slower pace of 4.9 per cent in 2022, from a projected 5.9 per cent growth in 2021. The US Federal Reserve has forecast the US to grow at a slower 4 per cent in 2022 compared to a projected growth of 5.5 per cent in 2021. According to the IMF, the growth in the Euro area is likely to slow down, from 5 per cent in 2021 to 4.3 per cent in 2022.

History shows that a year of slower growth compared to the previous year has always resulted in a fall in metal prices. In 2011, 2015 and 2018 — when global growth slowed down from the previous years — the base metals price index tumbled to give negative returns. The Bloomberg Base Metals Spot Price Index had tumbled 23 per cent, 24 per cent and 17 per cent respectively in these years. As such, the expected slowdown in global economic growth in 2022 is more likely to drag metal prices lower.

Slowdown in China

China is the world’s largest producer and consumer of base metals. The energy crisis in China in the second half of 2021 saw metal prices surging on the back of supply cuts. Seasonal production cuts in the country also pushed up prices. However, an easing energy situation alongside possible increase in production after winter — possibly from March — can aid supplies and soften metal prices.

Besides, data shows that China’s Construction Business Activity Index has been on a decline. The index has dropped from 62.3 in March to 56.3 in December last year. Other economic activity data points also indicate a slowdown in China. For instance, the ‘new export order’ metric under the Purchasing Managers’ Index for China has also come down, from 51.2 in March to 48.1 in December last year. So, unless growth in China’s property sector picks up pace, demand is likely to remain subdued.

The IMF projects China to grow at 5.6 per cent in 2022, significantly down from the 8 per cent growth seen for 2021. So, a slowdown in China, coupled with a possible increase in supply, can drag metal prices lower.

Higher supply, lower demand

The base metals complex is largely likely to be in surplus in 2022. Many closed down smelters are set to resume operations, easing the supply disruption caused in the second half of 2021. Demand, on the other hand, is likely to remain moderate.

The easy money available in the form of pandemic stimulus from the global central banks was also one of the major drivers of prices in 2021. This easy money is likely to vanish in 2022 and can bring down the demand. Major central banks like the US Federal Reserve and the European Central Bank have already begun the process of winding down the stimulus. In addition to this, the uncertainty prevailing over the spread and impact of the Omicron variant remains a threat to demand.

The International Lead and Zinc Study Group (ILZSG) has forecasted a surplus of 24,000 tonnes in lead and 44,000 tonnes in zinc for the year 2022. However, these are lower than the surplus of 27,000 tonnes and 217,000 tonnes in lead and zinc respectively estimated for 2021. Nickel is likely to turn to a surplus after a deficit forecast in 2021. According to the International Nickel Study Group (INSG), nickel can end with a surplus of 76,000 tonnes following a projected deficit of 165,000 tonnes in 2021. Copper is forecast to run into a surplus of 328,000 tonnes in 2022 from a deficit of 42,000 tonnes in 2021. The fact that supply is likely to outpace demand in 2022 can keep metal prices under check.

Easing freight cost

The lockdowns and travel restrictions imposed in 2020-2021 stalled the shipment of goods across countries and took freight costs sharply higher. The Baltic Dry Index, a measure of average price paid for shipping dry bulk commodities, skyrocketed 311 per cent from 1374 in January to 5650 in October last year as shipments stalled. Thereafter, the index has come off sharply by 59 per cent to 2,289, indicating easing of prices and resumption of shipments. Low freight cost can increase the shipments and improve the supply crunch, which in turn can ease commodity prices.

Strong dollar as a check

The movement in the US dollar will also be a major factor . The dollar and commodity prices are inversely correlated. That is, a strong dollar will result in weak commodity prices. Since commodity prices are denominated in dollar, that makes it costlier for buyers when the US dollar strengthens. Conversely, weakness in the US dollar makes it cheaper for the buyers and can drive the commodity prices higher.

The US is in the process of tightening its policy. Accordingly, the US Federal Reserve will end its bond purchases by March this year. In its December economic projections, the Fed has hinted at the possibility of three rate hikes in 2022. The US 10Yr Treasury yields have risen from around 1.4 per cent to 1.76 per cent now. Market is now expecting a much faster pace of rate hikes by the Fed. Though the US dollar index has been broadly in the range of 95.50-97, a further surge in the Treasury yields can take the dollar index above 97 towards 98 initially. A further rise past 98 can take the dollar index up to 100 and 102 levels in 2022. Unless the Fed changes its stance by hinting at a slower pace of rate hike or fewer than three hikes in 2022 on the back of the Omicron effect, the dollar is likely to remain strong in 2022 which in turn can drag metal prices this year.

On the charts, there is no confirmed top as of now. There could be room for the base metals to move up from current levels in the first quarter of 2022. Thereafter, the prices can top out and see a sharp reversal for the rest of 2022

Base metal index

The Bloomberg Base Metal Spot Price Index surged from 142.57 in March 2020 to 300 in October last year. It is currently at 281.57. As seen from the quarterly chart, there is room to test/close at 285 in the first quarter of 2022. That is, the index has chances to revisit 300 levels and then come down again. But thereafter, the chances are high for the index to tumble towards 240-230 in 2022. Intermediate support is at 260.

 

A break below it will pave the way for the above-mentioned fall to 240-230. The possible reversal in the index also indicates that the cycle could be turning down in the commodity prices. The room to test 300 before the sharp reversal indicates that base metal prices can continue to remain higher and even move up in the first quarter of 2022. Thereafter the prices can top out and see a strong reversal for the rest of the year as the index starts to fall, breaking below 260.

Aluminium

The Aluminium 3-month rolling forwards contract on the London Metal Exchange (LME) made a peak of $3,229 per tonne in October last year and fell sharply from there. However, the prices found support at ₹2,510 in November and have started to bounce back again. The contract is currently at $2,914.

 

A rise to $3,000 is possible from here. Even if a break above $3,000 is seen, it may not sustain. As such, $3,100-3,200 can be a cap from here. Thereafter, a fresh fall to $2,600-2,500 can be seen. A short-lived bounce to $2,700 from $2,500 cannot be ruled out. However, the broader picture will remain weak. As such, a break below $2,500 can drag the LME Aluminium price down to $2,300 towards the end of 2022. The expected path of move could be a rise to $3,000-3,100 first and then a fall to $2,500-$2,300.

Copper

LME-Copper 3-month rolling forwards has been volatile in the broad range of $8,700-$10,750 per tonne since April last year. The contract is currently trading at $9,647. A rise to $10,200-10,500 is likely in the next couple of months. But thereafter, prices are likely to come down towards $8,700 — the lower end of the range again.

 

We see high chances of the contract breaking the range below $8,700 sometime in the second quarter of 2022. Such a break can take the prices initially down to the intermediate support level of $8,300. After a corrective bounce from $8,300 to $8,500-8,600, LME Copper prices can eventually break below $8,300 and see a steeper fall to $7,500-7,300. Thereafter, a corrective bounce to $8,500 is possible. The bearish view could go wrong if the LME-Copper breaks above $10,500 decisively.

Zinc

The LME Zinc 3-month rolling forwards contract is relatively better placed on the charts. That is, there is still scope for a rise from current levels. However, strong resistance in the $3,900-4,000 region can cap the upside. It is currently trading at $3,533 per tonne. The price action since 2008 is in the form of a channel.

 

Though the upper end of this channel has already been tested in October last year, there are chances to revisit the levels of $3,900 again in the next couple of months. Thereafter a fresh fall to $3,400-$,3,200 can be seen initially. After a corrective bounce to $3,500, LME Zinc prices can fall back again, targeting $2,800 on the downside.

Lead

The LME Lead 3-month rolling forwards has been broadly oscillating in a range of $1,500-2,800 pertonne since 2010. The contract is currently trading at $2,278 per tonne. There is room for a rise to $2,600 in the next two-three months. We expect the sideways range to remain intact. As such, we can expect LME Lead prices to go down from the $2,600-2,700 region towards $2,200-2,100 initially.

 

Thereafter a corrective bounce to $2,400 is possible. A fresh fall again from around $2,400 can drag the prices down to $2,000 in the final quarter of 2022. As we expect the sideways range to remain intact, $1,800-1,600, the lower end of the range, can be tested in 2023.

Nickel

The LME Nickel 3-month rolling forwards contract can move up to $22,000 and even $23,000-$24,000 per tonne in the first quarter of 2022. Thereafter it can come down to $20,000-$18,000. Broadly, $18,000-23,000 can be the range of trade in 2022. A strong break below $18,000 can bring the prices under pressure for a steeper fall.

 

Since other base metals are looking vulnerable for a sharp fall, the chances of LME Nickel breaking below $18,000 are also high. Such a break will drag the prices lower to $16,000 initially. A further break below $16,000 can then drag the contract down to $14,000-12,000 eventually.