Industrial metals such as copper and iron ore have been amongst the biggest gainers in the post COVID-19 rally supported by strong economic recovery in China and the US. Copper prices also found support on the back of global drive to support clean energy and heavy infrastructure spending plan in the US. The whole world is looking for decarbonisation which needs industrial metals such as Steel and Copper to build new transport infrastructure.
In the last twelve months, all industrial metals have performed exceptionally well, iron ore prices rallied nearly 78 percent, copper 87 percent, aluminium 56 percent, silver & zinc 49 percent, nickel 40 percent and lead 31 percent. (As on May 19th)
Industrial metals performance in last twelve months with base month April 2020
The current rally in commodities is driven by strapping economic recovery lead by China and the US. China Imports, positive US economic data, recovery in global manufacturing activity and President Biden's Infrastructure plan have all played their part in this rally; we try to highlight them below.
China Economy
The Chinese economy is ranked number two in the world after the US, China accounts for a significant proportion of global trade in natural resources such as aluminium, coal, copper, and iron ore. As per government data, in April, industrial production grew by 9.8 percent from a year ago while it saw a 14.1 percent uptick in March. Also, China's gross domestic product (GDP) had expanded by a record 18.3 percent in the first quarter.
Retail sales rose 17.7 percent year-on-year in April which was 34.2 percent in March. Additionally, Investment in factories and machinery which is also referred to as Fixed-asset investment increased by 19.9 percent in the first four months from the same period a year earlier.
China Imports % Change YoY, Source: China General Administration of Customs
Copper imports in the first quarter totalled 1.44 million tonnes, up 11.9 percent year-on-year, and the highest first-quarter imports since at least 2008. Secondly, till April, China’s steel production was 375 million tonnes (mt), up 16 per cent compared with the year-ago period. The rise in steel production is resulting in robust demand for iron ore.
US Economy
Observing the current recovery and positive economic data, it is expected that the US economy may return to pre-pandemic levels by the third quarter of 2021. US GDP increased at a 6.4 percent annualized rate in the first quarter, which is followed by a 4.3 percent growth rate in the fourth quarter. It is the biggest first-quarter increase in growth since 1984.
Also, Consumer spending powered ahead at a 10.7 percent rate last quarter, US consumer spending rebounded in March amid a surge in income as households received additional COVID-19 pandemic relief money from the government.
The US Federal Reserve has promised it will probably not raise interest rates before 2023 to support the recovery of the pandemic-ravaged US economy which will keep financing cost low for longer term which is likely to support metals prices; increasing economic optimism in the US is also playing a part in supporting metals prices.
US Economy, Consumer Spending and GDP, Source: ABans Research
Global Manufacturing Activity
A positive trend in manufacturing activity in leading economies is also helping metals demand. Manufacturing PMI data from Eurozone, China, UK, US and Japan are showing robust recovery since March’20 (Image 4).
PMI data for leading economies since Dec 2019
President Biden's Infrastructure Plan
President Joe Biden’s $4.1 trillion economic spending agenda which includes $2.25 trillion infrastructure plan will help sectors like electric cars, driving further gains in commodities critical to the green-energy transition. Investment in electric vehicle, power infrastructure and expansion of the broadband infrastructure is increase consumption of Copper, Iron ore and Nickel.
Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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