Industrial metals see biggest Q2 drop since 2008 as sentiment collapses – ANZ
(Kitco News) Recession fears have triggered a collapse in sentiment, causing the sharpest decline in industrial metals prices in the second quarter since the Global Financial Crisis, according to Australia and New Zealand's ANZ Bank.
As central banks fight inflation with tighter monetary policies, recession fears are shifting sentiment on the global scale. And industrial metals are one of the first to feel the pain, ANZ senior commodity strategist Daniel Hynes said in a report.
Hynes described base metals as a barometer of economic activity after industrial metals tumbled more than 25% in Q2.
"Concerns of a global slowdown, flowing from the US Fed's aggressive tightening, structural changes in China's economy, and the impact of its COVID-19 lockdowns dragged down industrial metals more than 25% in Q2 2022. This was the sharpest quarterly fall since the Global Financial Crisis in 2008," Hynes said. "Amid interest rate increases and inflation, a risk is emerging that some major economies may experience a 'hard landing.'"
This sharp sell-off surprised markets, given the low inventory levels and supply challenges. However, ANZ does not see signs that a recession is inevitable.
"After starting the year in a buoyant mood, risk appetite has weakened. Our Financial Conditions Index continues to tighten and is pointing toward a sharp slowdown in US GDP growth (Figure 5). It is not yet suggesting the economy is heading into recession, but the risk is there," the report noted.
Due to existing risks, ANZ is downgrading its short-term price forecasts for base metals but remains optimistic in the long term, stating that this month's sell-off is overdone.
"The sharp sell-off this month has led us to lower our short-term targets across the sector. Downside levels are likely to be driven by expectations of inflation and how the market interprets central bank reactions. Stabilizing inflation could see markets reduce the risk of a global recession," Hynes described. "However, ongoing supply chain disruptions, tight labor markets, and persistently high electricity prices are not going to make that easy. We still see upside from current levels amid supply-side issues and low inventories."
The bank projects fiscal and monetary policies supporting metals demand until the end of 2022. "Supply-side issues can't be ignored. Mining headwinds associated with environmental, social and governance (ESG) requirements are exacerbating labor shortages and high energy costs, stalling plans to boost the output of copper, aluminum, and nickel. This is on top of the disruptions caused by Russia's invasion of Ukraine," Hynes wrote.
Inventories of aluminum, zinc, and nickel are at multi-year lows, and further tightness cannot be ruled out. ANZ also sees copper in the range of $9,000−$10,000 per tonne.
"At the LME, aluminum stocks fell by 62% to 358kt. This year so far, nickel inventories have fallen by 35%, copper by 52%, and zinc by 58%," Hynes noted. "The current backdrop calls for copper prices of around USD9,000−10,000/t compared to the current level of USD7,500/t. Aluminum's stocks-and-price relationship is not that strong due to its relatively elastic supply, but critically low inventories and looming supply challenges also call for higher prices."
At the end of this year, ANZ’s projects aluminum to be at $2,800 USD/t, copper at $9,000 USD/t, nickel at $25,500 USD/t, zinc at $38,000 USD/t and lead at $1,900 USD/t.
The big risk to ANZ's forecasts remains China's COVID-zero policy. However, if China's economy continues to recover as lockdown restrictions lift, the global demand for industrial metals will improve and help support prices.
"China's economic growth matters. China consumes more than 50% of the world's industrial metals supply. So a change in demand there will have a big impact on metal markets," Hynes wrote. "The Credit Impulse measures China's monthly change of the flow in new credit as a share of GDP, and it bottomed out in May but has since recovered to positive territory. This type of movement is usually followed by a recovery in growth in key sectors of the economy, including real estate and autos."