BloombergNEF
Despite the pandemic, metals are enjoying robust bull runs coming out of 2020. This is driven by positive investor sentiment reflecting macro and political trends, including the rapid deployment of Covid-19 vaccines in the U.S. and Europe, and expectations that an incoming Biden administration may alleviate U.S.-China trade tensions. That being said, not all bull runs are made of the same stuff. BNEF expects underlying fundamentals will result in some adjustments.
Copper price at $7,700 - $7,800/t is supported by robust physical demand and ongoing disruptions to supply. Disruptions continue in Peru, particularly at the Chinese-controlled MMG Las Bambas. Demand for copper remains robust in China. Maike Metals International Ltd., a Chinese copper trader, agreed to purchase refined copper at a $70 premium over the LME benchmark, similar to premiums signed in 2019. Freeport-McMoRan indicated that it agreed to 2021 treatment charges of only $59.50 per dry metric ton (DMT) ore with Chinese smelters, the lowest in a decade. Treatment charges are what smelters charge miners to process ore. Chinese smelters have been operating at record high rates since July 2020.
Aluminum on the other hand is likely to readjust back to below $1,800/t, the five-year average. This is roughly the break-even price of the global smelter fleet. Although there is short-term balance in the aluminum market, much of this is due to restraint on the part of Chinese producers. China still has significant underutilized capacity (with average smelter operating rates at only 60%) which would be incentivized to restart if prices remain high.
Iron ore prices pushed above $100/t in 2H 2020, as steel production in China remained strong despite the pandemic, but is projected to come back down to below $120/t by 2Q 2021. This coincided with continuing delays in restarting iron ore capacity in Brazil and a court ordered shutdown to Vale’s mines (totaling 10% of the company’s capacity) after hundreds of workers tested positive for Covid-19. Iron ore prices are now surging to near $180/t, causing alarm for the Chinese steel industry. Chinese regulators are already signaling price controls for steel making raw materials. The Dalian Commodity Exchange unveiled stricter rules for trading iron ore, trying to temper speculation. China’s steel production growth is also expected to cool in 2021 as regulators revamp targets while drafting the 14th Five-Year Plan. Supply depends on some production restarting in Brazil. Vale’s joint venture with BHP, Samarco Mineracao, resumed operations in December – five years after the Mariana dam failure. This does not bode well for Vale’s Feijao iron ore mine, which closed after the Brumadinho dam disaster in early 2019.
