Industrial metals, the best-performing commodities sector over the past six months, look set to extend their surge into 2021 as a China-led global economic recovery, a weak U.S. dollar and potential supply disruptions continue to lend support.
The S&P Goldman Sachs industrial metals index – a subset of the widely-tracked S&P Goldman Sachs Commodities Index (S&P GSCI) – has climbed over 38% since June 1. And copper, aluminium, nickel and zinc have all eclipsed price gains made by gold, which scaled all-time highs in August.
“The V-shape recovery in China, supported by the country’s strict and immediate lockdown implementation, government-led stimulus and supportive actions from the People’s Bank of China, continues to outperform market expectations,” said analyst Natalie Scott-Gray of broker StoneX.
The country’s mammoth manufacturing sector has recovered especially well, benefiting from a global boom in white goods demand as well as rebounding car production.
The last time the industrial metals index topped the annual rankings of the S&P GSCI indices was in 2017, when the global economy was expanding at its fastest pace since 2010 and aggressive cuts to excess capacity in top metal producer China fuelled a broad rally in base metals.
Before that, industrial metals notably outperformed other commodities sectors in 2009 as the world economy recovered from the global financial crisis.
So far in 2020, industrial metals are up 21%, just behind the precious metals index’s 22% rise, S&P data showed.
“The pandemic downturn has been unique,” StoneX’s Scott-Gray said.
She noted that historical downturns have seen industrial production drop by roughly twice as much as gross domestic product (GDP), whereas in 2020 the industrial output decline has been the same as the GDP drop rather than worse, thanks to the steep rebound in China’s manufacturing engine.
Also supporting industrial metals are a slew of global stimulus measures and supply disruptions in mines in Peru and Chile caused by COVID-19 lockdowns and dragged-out pay disputes.
A series of global green energy deals also look set to boost demand for copper, aluminium and nickel in electric vehicles and charging stations, as well as renewable power generation.
Large investment funds are anticipating further price gains, holding record net-long positions on the London Metal Exchange (LME) in copper, aluminium, zinc and nickel, according to the exchange’s commitments of traders reports.
As a result, benchmark three-month copper on the LME hit its highest since February 2013 on Friday, while aluminium hovered around a two-year high, nickel touched a 14-month high, and zinc stood a near 20-month high.
But looking ahead, ING analyst Wenyu Yao said the industrial metals-heavy phase of the global economic recovery will fade over time.
“In the early stage of economy recovery, we tend to see industrial metals gain more traction,” she said. “That trend could reverse - meaning precious (metals) overtake industrial again - once the economic recovery is well on track and signs of inflation rise.”
Colin Hamilton, managing director of commodities research at BMO Capital Markets, concurs that an inflection point will come at some stage next year.
“Industrial metals will remain strong through early 2021, before a slowdown in Chinese bank lending, particularly to the property sector, starts to weigh,” said Hamilton.
Reporting by Mai Nguyen and Gavin Maguire; Editing by Kenneth Maxwell