Manufacturing uptick drives new wave of demand in base metals

After what has been a tough two years for metals demand as a result of a slowdown in manufacturing – particularly in China – the outlook is brighter at the dawn of the new decade. Nick Snowdon, Deutsche Bank’s Metals Analyst at Deutsche Bank Research joins Trade Finance TV to explain how firms had been destocking and acting on a hand to mouth basis which has resulted in a very lean supply chain.

However says Snowdon, following his visit to China at the end of 2019, he could see how China’s infrastructure projects had progressed from new starts to a pick-up in completions, “a very positive stage of a cycle”.

While the Coronavirus is no doubt a destabilising factor, business as usual will eventually return and underlying fundamentals point to a broader growth trend, he notes.

In this episode, Nick also explains how supply is constrained by lack of mining company investment but that pricing looks set to soften in iron ore once Brazil recovers from the dam disaster in Brumadinho.

Transcript of interview:

Clarissa Dann Welcome to Trade Finance TV, your insight into the global trade climate for importers, exporters and their financiers. I’m Clarissa Dann. In this episode we’re talking with Deutsche Bank analyst Nick Snowdon, about the supply and demand for metals and the impact on trade.

Nick, welcome to Trade Finance TV.

Nicholas Snowdon Thank you for having me.

Clarissa Dann It’s been a funny old year in commodities, but actually rather positive in terms of infrastructure that’s going on. And how is that affecting demand for metals?

Nicholas Snowdon Well, the last two years have really been two tough years for for metals demand, primarily because of the slowdown in global manufacturing, particularly focused on China and also kind of aggravated by the US/China trade tensions. But towards the end of 2019, we saw two positive trends. One, a broad uplift in manufacturing trends in China, US, Europe, and also, of course, a kind of apparent step forward in US/China trade relations. So we start 2020 actually on quite a positive footing for for global’s metal demand.

Clarissa Dann The whole business of supply chain de-stocking and the brinkmanship. Would you tell us a bit more about how you think that’s going to play out?

Nicholas Snowdon Yeah, well, exactly. Because of the lack of confidence globally in manufacturing for the last couple of years, we saw this very clear trend, right along most metal sectors, where firms were de-stocking and acting on a very kind of hand-to-mouth basis. And ultimately, that’s led us to a very lean supply chain position at the beginning of 2020. So if global growth continues to improve, then that should lead us into some very positive demand transfer for commodities.

Clarissa Dann You’ve just done a trip to China, haven’t you? Would you tell us a bit more about your findings?

Nicholas Snowdon When you look at China, as of today, there are two issues. One is the broader economy and then obviously the very unfortunate episode with the coronavirus. But in terms of the broader growth trends into the beginning of 2020, we actually began to see some very positive developments. One on the infrastructure side; Beijing has really been channeling support for a pick up in infrastructure investment. And that’s now really starting to play out, particularly in terms of the transit networks, port developments, but also in terms of the property sector. For the last couple of years, we’ve seen a bit of a pick up in new starts in the property sector, but now that’s really starting to feed through into a big pick up in completions, which is a very positive stage of the property cycle for base metals. So those two factors, infrastructure and property, we really do see being positive drivers for global demand this year.

Clarissa Dann And what did you actually see when you were out there? What are the things that struck you?

Nicholas Snowdon Well, I think, first of all, from a kind of broad sentiment perspective, I’ve been going to China, you know, on and off for the last decade or so and over the last couple of years, particularly in 2018, and in the first half of 2019, there was a clear lack of confidence. And the trade war issue was a factor in that, as well as just a broader kind of growth slowdown.

When I was there in late November, early December, actually, for the first time in two years, there was a bit of renewed confidence and that was beginning to feed through into kind of planning for the year ahead, investment purchasing of raw materials. So there was a bit of confidence in late 2019, certainly.

Clarissa Dann Let’s turn specifically now to copper.

Nicholas Snowdon Yeah.

Clarissa Dann It is a strange metal, isn’t it. It is a kind of a bellwether of others and of overall health of an economy. Do you want to tell us a bit more about how you think that’s going to go?

Nicholas Snowdon Yes. So, you know, primarily when you think about copper on the demand side, it’s all about China. It represents about 50% of global demand, but on an annual basis, it drives 90+% of demand growth. So demand wise, it’s all about what’s going on in the Chinese economy. So as I was saying, you know, infrastructure and property look quite positive. But obviously, in the short term, we are seeing some dislocations in the Chinese market from this terrible virus that’s impacted the economy.

Our view and hopefully it is the case that, that kind of moves into a more stabilizing phase over the next month or two and then eventually get back to business as usual in China. So from that demand angle, we do think that things will eventually turn more positive on the supply side the story really is one of very, very limited supply growth. In fact, for the last three years, global copper mine supply hasn’t grown. In 2019 production was the same as it was in 2016. And what does that reflect? Is it really just a lack of investment by mining companies and new projects?

And as you look into 2020 and 2021, it’s the same story; very little supply growth expected. So combine those two aspects of the copper market. It’s a pretty positive China outlook once we get past this unfortunate episode and this story of supply constraint you; you have the ingredients for type fundamentals and price support, so it’s ultimately a pretty bullish story going forward.

Clarissa Dann And the concentrate which comes mainly from Chile. What’s holding back that there coming more of it?

Nicholas Snowdon Well, I think that there are a couple of issues, you know. One is just, you know, we’ve been mining copper for the last hundred years and all of the very easy, high quality deposits have been depleted. And now the kind of deposits that are left are either in very hard locations high up in the mountains, but ultimately with the highest cost to mine. So that’s really restraining production, growth rates.

But also more generally, we’re in an environment where, because we’re no longer in this massive boom in demand that we saw in China over the last 20 years, things are moderating. Investors aren’t rewarding mining companies to invest heavily. So it’s an environment where we think that  investment will remain restrained and ultimately that then restrains how much additional copper supply will get.

Clarissa Dann Let’s turn then to iron ore.

Nicholas Snowdon Yes.

Clarissa Dann What’s the story there?

Nicholas Snowdon Well, I think there are two sides of the equation. You know, in 2019, we had this very tragic incident in Brazil where the Brumadinho Dam collapsed with terrible consequences in terms of human life loss, but also in terms of the actual iron ore market. You know, we lost a huge amount of supply in a very short space of time and in 2019 and even now into early 2020, the supply side is only slowly recovering from that loss in Brazil. So that’s a real tightening effect.

But also alongside that, last year, we saw a pretty strong picture for Chinese steel demand, a lot of investment in new new starts on the property side, and that combined to create a strong price environment. Now, moving to 2020 what’s the story now? Well, you’re getting this slow recovery in Brazilian production this year and that will pick up through the course of the year. And at the same time, we think that new starts of property in China will decelerate. So it contrasts well with copper. For iron ore we think things are going to get softer and prices are going to fall. Whereas for copper, we think things are going to get tighter and ultimately that should generate a higher price environment.

Clarissa Dann Nick, thanks so much for coming in to talk to Trade Finance TV.

Nicholas Snowdon It was a pleasure to be here.

Clarissa Dann I’d like to thank next Nick Snowdon, and of course, all of you for watching. To catch our monthly reports on other markets or to subscribe to our newsletter, do go to TRADEFINANCETV.NET.

Published on February 28, 2020

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