BASELINE VIEW – PRECIOUS METALS:
Post the recent release of US Non-Farm Payrolls and Fed speak pointing to the potential for higher rates than currently priced we may see the precious metals market struggle in the coming weeks until further clarity on global interest rates and more specifically the direction of the dollar is received.
BASELINE VIEW – INDUSTRIAL METALS:
Supply/demand imbalances for industrial metals remain and this coupled with China reopening should continue to support prices in the near term. Further out in 2023 we could see demand start to the weekend as the economic cycle weakens and this would coincide with a recovery in supplies. Much also depends on the action of central banks throughout the next couple of months given that some have indicated the tightening will continue.
Given the importance of US Monetary Policy to both the dollar and thus by extension gold, we will bring the reader up to speed with the developments of late. In line with consensus expectations, the FOMC unanimously voted in favour of hiking interest rates by 25bps in February, taking the lower and upper limit of the Fed Funds Rate to 4.50% and 4.75%, respectively. The big takeout from the FOMC statement was – “ongoing increases in the target range will be appropriate to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time, On Friday, we saw gold tumbled by 2.5% after unexpectedly strong US jobs data. This recalibrated rate hike expectations. Fed fund futures traders are now expecting rates to rise above 5% in May. High interest rates will likely weigh on golds rally in the coming months.
Gold demand in 2022 climbed to its highest level since 2011, driven by a surge in buying from central banks, according to the World Gold Council. Annual gold demand increased 18% last year to 4,741 tonnes. Purchases by central banks more than doubled to 1,136 tonnes, with most of this buying occurring over the second half of the year. During times of economic and geopolitical uncertainty and high inflation, banks appear to be turning to gold as a store of value. Given that the current unsettled geopolitical environment is likely to persist, we believe central banks will continue to add to their gold holdings in the coming months.
Our view: Gold tends to benefit in a lower interest rate environment, thus pricing for lower rates by the close of 2023 will underpin the yellow metal in the long term. Gold bulls will be paying particular attention to signs of a slowdown in the US economy, which will likely greenlight an even slower pace of rate hikes by the Fed. In the short term, gold may struggle as the market jostles with the strength of the dollar. The key level to keep an eye on in the coming weeks is $2000/oz, which was last reached in April 2022.
South Africa is currently experiencing the worst-ever power blackouts which are threatening platinum and palladium supplies. According to Impala Platinum Holdings the expectation is that platinum production is going to decrease during this year. Reduced output may help to support prices, however the lower volumes could weigh on producer margins at a time when they are already facing inflationary pressures.
Our view: $1000/oz has been acting as a key physical support level for platinum over the last few weeks, if we start to see a decline in global platinum supplies, we will see prices rise back towards mid-2022 levels. Pulling back the lens, the high that we saw in 2022 was $1183/oz which will likely act as a key resistance level for platinum.
Base metals have the following factors driving price action:
- Reopening of China, markets are optimistic of a demand rebound
- Slowdown in global economic growth
- Market shift towards electric vehicles
China: China has removed its zero-covid policy, which has been weighing on the growth of the economy since the start of the pandemic. Markets are now starting to become optimistic that we are going to see a rebound in demand from China in 2023, which is likely to support base metal prices. China’s purchasing managers’ index showed the manufacturing and service sectors expanded for the first time in four months in January, indicating that a recovery in the economy is coming.
Physical demand in China has been muted following the Luna New Year holidays, however, there will be a rebound as more activities as traders and buyers return in the coming weeks. Recently, we have seen commodities such as copper and iron ore being supported by the market’s optimism about China’s demand. There are still, however some risks that if new Covid-19 cases start to increase dramatically, then Beijing may reintroduce some restrictions that would be demand negative.
Global economic growth: The IMF’s world economic outlook forecasts that global economic growth will slow from 3.4% in 2022, to 2.9% in 2023. Reduced global economic growth prospects reflect a unique mix of headwinds, including Russia’s invasion of Ukraine, interest rate increases to contain inflation, and lingering pandemic effects of China’s lockdowns and disruptions in supply chains.
The question that will drive many discussions is whether it will be weaker demand or supply-side pressures that impact specific commodities more. For commodities where supply pressures remain tight, prices should remain supported over the near term.
Electric vehicles: In the near term, the momentum in the electric vehicles market is expected to slow due to several factors such as the end of China’s subsidies, Europe’s energy crisis, high inflation, and recession fears in the US. China is the largest EV market and therefore there is likely to be a deceleration in demand due to China having to adapt to a subsidy-free scenario. The two other biggest markets for EVs, Europe and the US, are also expected to face significant challenges this year, largely owing to macroeconomic factors and the overall outlook. However, in the longer term, we expect the demand for EVs and the metals used in these vehicles to increase as policies are already being implemented in all of the key regions to encourage electrification in order to decrease carbon emissions in the coming years.
After almost a decade of limited copper-focused exploration and project development, the outlook for future mined supply faces significant headwinds as demand for metals related to the global energy transition accelerates over the coming years. Potential new mines will also face rising environmental, social and governance scrutiny, which will likely limit the number of new projects available for the global mined copper supply pipeline.
China’s economy is expected to rebound following Beijing scrapping its zero-covid policy, boosting consumption of everything from copper to aluminium and iron ore. Base metals have had a strong start to the year as the markets are optimistic about a demand rebound in the coming months.
Our view: 3m LME copper reached a seven month high at the start of January, hitting $9500/tonne. The expectation of a slowdown in US interest rate hikes has resulted in copper’s upward momentum slowing. However, bets of demand rebounding from China and dollar weakness are likely to support copper prices in the coming months.
3m LME tin hit a three-month high this month, as the suspension of operations at Peruvian producer Minsur’s San Raphael mine due to social unrest has fanned the bull flames. However, arguably more significant to market dynamics has been the strength of China’s import appetite. China imported 31,115 tonnes of refined tin last year, up from just 4,900 tonnes in 2021 and the highest volume since 2012.
Our view: The tin price is currently in the Goldilocks zone, not high enough to frighten off physical users, and not low enough to threaten existing supply. Going forward, there is likely to me some turbulence within the tin market as Chinese investors have a new-found interest in tin.
Aluminium had a roller coaster year in 2022, initially rallying as much 45% to hit a record high in March on worries about Russian supply, before slumping on mounting concerns about demand. Prices have rebounded strongly in 2023 however we have seen them ease in recent days
Our view: LME Aluminium Alloy warehouse stocks have remained unchanged which should help to ease supply concerns, the world is also adjusting to a market with sporadic or non-existent Russian supplies and this will calm price action further with volatility in 2023 not expected to be the same as 2022.