Robust price rallies across most commodities in the opening weeks of 2022 have set metal markets on course for another strong year, though a lag in upstream mining investments along with persisting inflation could dampen certain long-term metal outlooks.
Forecasts for metal prices in 2022 will depend heavily on how much funding comes through for new and expanded mine projects needed to meet rising demand, according to Justin Smirk, a senior economist at Westpac Institutional Bank.
"A post-COVID surge in demand, plus rising demand for some metals to build clean energy infrastructure, has been met by restrained investment in mining and extraction capacity due to a growing focus on [environmental, social and governance] commitments," Smirk said in a Feb. 7 note.
Upward price momentum throughout markets for bulk commodities and base metals in December 2021 and January has been primarily driven by tight supply fundamentals during a time of high demand for metals worldwide as economies attempt to ramp back up to pre-pandemic levels. S&P Global Market Intelligence analysts expect high metal prices to buoy mining exploration and development in 2022, forecasting a 5% to 15% increase in exploration budgets during the year.
The S&P Global Platts IODEX 62% Fe iron ore price increased to $133.70 per tonne on Jan. 24, up from $106.70/t on Dec. 9, 2021, thanks to limited supply and a flurry of restocking activity in China. The London Metal Exchange three-month nickel price hit an 11-year high in January, amid high demand for the metal before the Lunar New Year holiday in Asia and uncertain supply outlooks in Russia and Indonesia, according to Market Intelligence analysts.
Meanwhile, the London Metal Exchange three-month copper price rose to $9,931/t on Jan. 12, increasing from $9,480/t as of Dec. 6, 2021. In the first days of February, copper prices started to outpace other base metals as fears around the stability of Chile's copper supply mounted, according to a Feb. 4 report published by J.P. Morgan.
Steel is forecast to record strong gains in 2022 after a lackluster final quarter in 2021. Robust infrastructure development in China alongside the transition to low-carbon energy sources has led several analysts to maintain a bullish outlook for the commodity. Yet supply chain disruptions and the COVID-19 pandemic will mean a slow start for steel in the first quarter. These factors, in addition to disruptions to China's industrial activity during the Lunar New Year and the 2022 Beijing Olympics, have led to slowdowns in steel production. But delays will likely not last long and could be less severe than originally forecast by some analysts.
"Demand should sharply accelerate in [the second quarter] and into [the third quarter] as supply chains improve and service centers need to come back into the market to size up for better demand patterns we expect," research analysts at Credit Suisse said of steel in a Jan. 25 note.
On Feb. 7, J.P. Morgan equity researchers raised their 2022 forecast for iron ore, a key raw material used to make steel, to $114/t from $92/t, anticipating a rebound in Chinese steel production post-Olympics.
"Restrictions have been less severe than we expected and annualized China steel production rebounded faster than we forecast," the analysts said.
Looking ahead, added bulk commodity supply, especially iron ore and coal, could help ease prices in 2022, while base metal prices are forecast to stay around current levels well into mid-year before correcting slightly, analysts at Westpac Institutional Bank said.
Inflationary pressures mount
Despite bullish demand and price projections for metals, growing cost inflation could also hamper mining companies in the weeks to come, according to J.P. Morgan analysts.
"Many corporates have so far underplayed the impact of cost inflation and we wouldn't be surprised to see heightened risk of volatility if corporates use the upcoming reporting to warn on costs and margin," J.P. Morgan analysts said in a Feb. 4 report. "Cost inflation will be a dominant theme across the sector for H2'21 earnings and 2022 guidance."
In addition to rising inflation, mining companies will also confront high costs in the coming months when undertaking maintenance and stripping that was previously delayed because of the COVID-19 pandemic, analysts said.
Companies producing aluminum and copper could be particularly sensitive to inflation pressures, in addition to those with operations heavily reliant on freight rates and diesel, pet coke and coal.
S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.