What exactly is driving this frenetic rally in metal prices…
The meltdown in metal prices began around 2012 and metal prices globally were on a downtrend ever since. However, after bottoming out around late 2016, metal prices have almost recovered most of the losses since 2012. If you look at the Bloomberg Industrial Metals Sub-Index, it is up by 58% in the last 1 year alone. This is reflected in the stock prices of most of the metal companies in India too. What exactly is reviving this rally?
Greenshoots in China…
When it comes to metal demand, no country is as significant as China. That is hardly surprising as China accounts for nearly 50-60% of all the industrial metals consumed across the world. Since 2011, China has been consistently seeing its GDP growth rate weakening from 11% down to below the 6% level. That appears to have bottomed out with China likely to report 6.5% GDP growth for the full year 2017. That is great news as it implies that demand from China will be buoyant and metals will be the big beneficiary. Secondly, China has also been limiting its own metal supply as environment considerations have emerged as the biggest challenge for China in the last couple of years. This combination of higher Chinese demand and lower Chinese supply is creating a boom for global metal prices. The LME price index of most of the industrial metals is already showing signs of this rally as are metal stocks globally!
Is a global revival on the way?
To be fair, the global metal prices are not just betting on a revival in Chinese demand but also in an industrial recovery across most of the developed world. We have seen a sharp uptick in factory output (PMI-Manufacturing) across Japan, Europe and even in the US. Recovery in factory demand has bigger implications for demand for industrial metals and that is another trend that the world metal markets are betting on. Then of course, there is the story of US tax cuts which is going to benefit corporates substantially. The $1 trillion infrastructure outlay proposed by Trump is also going to have a salutary impact on metal prices. There appears to be a true-blue global story that now appears to be backing the metal price rally. It is all about global demand!
An emerging shift…
Apart from the developed world, there is likely to be a big demand push from emerging stories. Indian steel demand is likely to triple in the next 10 years. Then there is a big demand push likely from countries like Indonesia, Iran, Turkey and Nigeria. The $1 trillion GDP mark normally acts as the trigger point for a big spurt in metals demand and there are a large number of countries that could provide the required momentum. Metals demand appears to have finally reached a sweet spot. The next few months could be critical! ©
