A strong start to the year, a weak patch from February-end till June and a thumping rally since then. That’s been the trajectory of base metals so far in 2017.
Copper and aluminium have been the best performing base metals this year, each up 15 percent year-to-date. Zinc has gained 13 percent while tin and nickel have lagged.
The current rally has been buoyed by a pick-up in global economic growth, hopes of revival in demand, especially in China and euro zone and dollar weakness. Signs of stability in China, in particular, has driven the rally, Robin Bhar, head of metals - global markets at Societe Generale told BloombergQuint in an interview.
Here are edited excerpts from the conversation.
The Key Triggers
What led to this ongoing rally? Is this demand revival in China? Dollar weakness and curbs or an oversupply or a combination of all of these factors?
The major factor is signs of stability in China. We have economic data showing that growth is continuing to surprise on the upside. That’s clearly significant because China is the largest consumer of all metals in the global economy. Also, there are signs the government in China is consolidating capacity. It started with the coal and the steel industries. Now it’s been expanded to include aluminium, lead and zinc and other industries in a bid to rationalise competitive production, but more importantly, to try and curb some of the environmental problems the country has faced. Particularly with smog and pollution over the winter months which the government is tackling very hard. And of course, these commodities are priced in dollars and the dollar has been weak and of course that has helped underpin the prices. And very recently, with a slew of investors found jumping on to the bandwagon, base metals saw some momentum buying and prices moved higher. We see some good returns coming from the sector.
More Legs To The Rally?
Earlier this year we saw a lot of that rally was supply-related. But recently we’ve seen demand picking up? Is that something you see as well?
Yes, demand has remained quite strong, it isn’t as good as it would have been prior to the financial crisis, prior to 2007. But it’s getting better. I would say this year is probably the first year of synchronised upswing, so stability in China, growth coming into the U.S., Japan has recorded a very strong quarterly GDP growth numbers very recently. The euro zone as well has shown some good economic data. So it is the first year of a synchronised upswing in the global growth. And of course base metal demand is highly leveraged to global growth. So that does reflect confidence about the prospects to the global economy, highlighted by IMF and World Bank coming out with favorable comments about the global economy, although warning about the excessive debt levels in China. Overall, the upswing should continue certainly for the foreseeable future.
The ‘China’ Factor
Do you think this rally is sustainable? And how long can it sustain?
I think it is sustainable through to the end of this year. I think Chinese growth remains strong this year. We have the National People’s Congress in October-November where the Chinese cabinet is reshuffled. I think the government will want a stable backdrop to that change in government both before and after to provide stability and send a strong message to the rest of the world, especially the U.S. which is looking at China in terms of trade practices and keeping its currency undervalued and so on. So certainly for the remainder of this year I think global growth remains strong, then becomes murkier as we go into 2018. Largely because we think China will slow. We think credit growth in China will begin to trend lower. However, a slowed China may well be offset by better growth in the rest of the world. I don’t think it is too negative going forward. The next 5-6 months should show some stability in global growth and and I think that will help to underpin further increases in metal prices. Next year though, it is not clear whether growth can continue to build on the momentum that we had this year, primarily because we the Chinese government will not want to boost credit as they have done both last year and this year because of the clear dangers of a over-indebted economy.