With the COVID-19 pandemic entering its third month, we have reduced our metals price forecasts in April as the fallout from the pandemic intensifies. We are, however, starting to see positive signs as some regions begin to relax lockdown measures. We still expect metal prices to rebound in the second half of 2020, having already hit their lowest point this year. The return of cautious optimism is a welcome relief, but many challenges remain. To paraphrase Winston Churchill, this may be the end of the beginning of the downturn, not the beginning of the end.
Despite lockdown measures loosening in a number of European nations, S&P Global Economics has reduced its 2020 global GDP growth forecast to a 2.4% contraction, compared with a March forecast of a 0.4% rise. This darker outlook is primarily driven by lockdown measures in many countries being extended past their original proposed finish dates. This is expected to push back the start of a global recovery. Our downward price revisions are also based on S&P Global Economics not expecting the level of Chinese stimulus seen during the 2008-09 financial crisis. As more countries emerge from their lockdowns, demand is expected to grow at the rate at which national economies can rebound.
This research article follows our April 8 COVID-19 impact to metals prices Part 2 article and explores our latest views on the pandemic's expected impacts on the metals market, with particular focus on iron ore, copper, zinc, nickel and the key battery raw materials.
The month of April saw no new announcements by the World Health Organization regarding the coronavirus for the first month since December 2019. At the time of writing, the number of cases globally had reached 3.54 million, with a death toll of 250,100. By the end of April, Italy had passed its infection peak and lifted its lockdown. A number of European nations followed.
More positive news came from Chinese macroeconomic data. The NBS manufacturing purchasing managers' index for April is 50.4, remaining in expansionary territory for the second consecutive month. The Caixin Purchasing Index fell slightly, to 49.4 from 50.1 in March, but was up from a record low of 40.3 in February. This was not enough to prevent S&P Global Economics from decreasing its forecast 2020 China GDP growth rate to 1.2% from 2.4% previously. In the rest of the world, S&P Global Economics now forecasts lower growth rates than in March. The U.S. is expected to shrink by 5.2%, down from a fall of 1.3% previously. This has impacted the eurozone's forecast GDP change, as the U.S. is its largest export partner. Eurozone GDP growth is now forecast to fall 7.3% year over year, compared with a fall of 2% forecast in March. Global growth is now forecast to shrink by 2.4%.
As measures to control the spread of COVID-19 are seen to succeed and regional lockdowns are relaxed, suspended mining operations can resume production. The weeks of restriction will, however, continue to impact the entire value chain, from exploration to production. Countries dependent on mining revenue, such as South Africa, Mexico and Canada, will be greatly affected.
April ended with all base metals well below their prices at the start of the year, as the pandemic continues to disrupt global demand. Copper, which is often the standard-bearer for base metals, has decreased the most, down 16% from US$6,166 per tonne at the start of the year to US$5,189/t April 30. Zinc also ended April 16% lower than the start of the year, and iron ore, lead, nickel and lithium carbonate are all down between 8% and 14%. Some positives can be taken, however, as copper, zinc and nickel all ended April with price increases over end-March — by 8%, 4% and 8%, respectively.
Zinc demand heads downward in April
We now forecast zinc consumption in 2020 to fall by 3.1% to 13.31 million tonnes from 13.73 Mt in 2019. This is the primary driver for our revised zinc price forecast for 2020, which is now US$2,022/t, down from our March forecast of US$2,065/t. This price is 4% higher than at the end of April and 8% higher than end-March. The resumption of global economic activity supports our view of a demand recovery in the second half of 2020. Since our last article, no significant mine closures have been announced, but lockdowns continue in several key regions: Peru, Mexico and Canada. We have therefore reduced our mine supply estimate for 2020 to 13.26 Mt, down from 13.73 Mt in 2019.
Iron ore – Prices steady for now
Despite the economic gloom of the past few months, iron ore prices managed to avoid much of the downside impact in April, holding broadly stable at around US$84/t. The cue of China normalizing economic activity is helping to support prices. Chinese steelmakers have ramped up production in April and early May, while a slowdown in seaborne supply in the first quarter helped to reduce iron ore stocks. Buoyed by a Chinese recovery, Australian miners have maintained their production target guidance for 2020. This positive sentiment is in marked contrast with the European steel market, where production plunged 20% year over year in March, in response to weakening demand. We forecast that the second quarter will mark the bottom of this year's iron ore price cycle, as the full impacts of ex-China steel production cuts filter through. Competition is likely to intensify as suppliers look to divert tonnages usually destined for the European market to China. With the U.S. and Europe starting to emerge from lockdown in May, economic activity and iron ore prices are expected to build cautious momentum before rallying in the fourth quarter, fueled by the prospect of a better 2021 ahead.
Nickel set for 1st surplus since 2015 on COVID-19
April was another volatile month for the nickel market. The London Metal Exchange three-month nickel price increased to US$12,514/t April 20 — the highest price in more than a month — on supply-side support, mainly on news that Philippine top nickel ore producers Nickel Asia Corp. and Global Ferronickel Holdings Inc. had decided to suspended some operations to contain COVID-19. The price then fell back below US$12,000/t on April 22 on increased risk aversion after the pandemic caused U.S. oil prices to drop below zero dollars for the first time ever. The average LME three-month nickel price was consequently flat month over month in April at US$11,870/t.
Supported by S&P Global Economics further lowering its expectation for 2020 global GDP growth, we continue to expect the pandemic's impact on global primary nickel demand to overcome supply-side support from the additional negative pressure that the Philippine mining suspensions will have on China's primary nickel output. In our Nickel Commodity Briefing Service report for April, we increased our forecast for the 2020 primary nickel market surplus to 48,000 tonnes from 11,000 tonnes previously, which would be the market's first surplus since 2015. We therefore further slashed our 2020 average LME three-month nickel price forecast to US$11,915/t from US$12,036/t, a decrease of 14.7% year over year.
Battery materials
Supply concerns support cobalt, slow electric vehicle restarts dampen lithium
Cobalt mine supply is significantly more concentrated than lithium supply and has a higher risk of disruption. We believe, therefore, that cobalt prices will be better supported than lithium prices for the remainder of 2020.
The Democratic Republic of Congo accounts for 68% of cobalt mine supply. There were no further lockdown orders on the country's copper-cobalt mine production in April, but cobalt prices held steady, factoring delayed deliveries to China from shipment queues in African ports. In comparison, the lithium carbonate price in China declined by 4.8% month over month in April.
European electric vehicle sales had a strong first quarter, reflecting uplift from the European Union's tightened vehicle emissions standards. We expect, however, that Europe's higher EV penetration rate will not be enough to reverse the decline in global EV sales this year, due to lower overall auto sales and reduced EV subsidies in China since July 2019. As key European EV markets such as Germany and France begin easing their lockdowns, uncertainty around a potential second wave of coronavirus infections also poses downside risks to sales.
Some EV production has restarted in Europe and the U.S. Pending negotiations with the local government, Tesla plans to resume work at its Fremont site in the U.S., idled March 23. Fremont produces 73% of Tesla's global vehicle capacity and requires over 5,300 tonnes per year of lithium carbonate equivalent and 1,200 t/y of cobalt metal for the nickel-cobalt-aluminum batteries used in its electric vehicles. Volkswagen is restarting production of its fully electric ID.3 model at its Zwickau plant in Germany, idled in mid-March; customer deliveries are scheduled to start this summer. We nevertheless expect global EV sales to decline by 7.4% in 2020 to 2.16 million units.
Copper rebounds strongest among base metals
Although copper had the worst-performing base metals price in the first quarter, it has had the strongest rebound since, with the LME cash official settlement price increasing 9% to US$5,231/t on April 30 from US$4,797/t on March 31. We assess this to be primarily the result of supply disruptions at major copper mines such as Los Pelambres in Chile and Las Bambas and Antamina in Peru due to COVID-19.
As a result of the supply disruptions, we now forecast that mined copper production will decrease by 3% year over year to 19.6 Mt in 2020.
Lower availability of copper concentrate, lower treatment charges and measures to contain COVID-19 lead us to expect a fall in refined copper production of 2.6% year over year to 23.5 Mt in 2020. This is supported by Glencore and Rio Tinto, two of the world's largest refined copper producers, lowering their 2020 production guidance in the past month. Since March 31, we have reduced our refined copper consumption forecast for 2020 by 275,000 tonnes. This was supported by purchasing managers' indexes decreasing in China, the U.S., the eurozone and Japan and is further supported by S&P Global Economics reducing its global GDP forecast to a contraction of 2.4% April 16 from its expectation of 0.4% growth at end-March.
Gold – Treading water, for now….
After gold dropped in mid-March, due to liquidation of gold holdings to meet margin calls, the London Bullion Market Association PM gold price sustained a three-week price rally to reach a seven-year peak of US$1,741 per ounce April 14. That rally, driven by safe-haven buying and negative yields on U.S. treasuries in real terms, halted the same week after President Donald Trump released his administration's guidelines for "Opening up America" on April 17. This instilled confidence in investors, leading to a weak but sustained recovery in U.S. equities.
COVID-19 has also affected the logistics of transporting bullion, as commercial flights, which carry most bullion, ceased, and refineries in China and Switzerland closed down. While there was never a shortage of gold, there were shortages of the correct types of gold for certain uses. Gold traded at a premium in New York compared with London, due to a shortage of the 100-ounce bars, which are required. The LBMA and the CME Group have worked to increase liquidity in the physical market, but higher-than-normal bid-sell spreads remain.
Looking ahead, any dip in the equities markets or adverse macro data should be positive for gold. In the second half of 2020, if U.S. treasuries continue at historic lows, the recovery continues to be weak and the flight to safety continues, we will see gold touch historic highs in U.S. dollar terms.
