After a strong start to the year, commodity prices pulled back in March. Aluminium and iron ore edged up by 1%, but Brent, copper and gold all fell by around 3%.
While economic data has been robust, rising virus cases are causing some jitters, and a stronger USD is weighing on the whole complex. Nickel was particularly weak, as forecasts for Chinese supply have scaled up.
The latest global manufacturing PMI showed another improvement, increasing to a 10-year high of 55.0 in March, up from 53.9 in February. The Euro area was strong, with the PMI in Germany and The Netherlands reaching a record high. Manufacturing in the US is also growing rapidly, and US non-farm payrolls jumped by 0.92m in March – a seven-month high.
However, one of the concerns is around inflation, with input and output prices in many parts of the world accelerating due to Covid-related shortages. For now, central banks are assuming that the threat of inflation will be a short-lived phenomenon, with the Federal Reserve stating that it expects to keep US rates very low for the foreseeable future.
The ongoing impact of Covid
Dealing with Covid-19 will remain a persistent challenge this year, and the number of new cases is now rising once more as countries try to escape from lockdown measures. Covid is making life difficult not just for central banks and governments but anybody trying to predict the path of economic growth in the months ahead.
The number of new Covid cases globally reached a low point of 361,000 on 20 February but then rose sharply to 586,000 by the end of March. Problem areas include Brazil, Europe, India and Turkey.
France and Italy have seen a surge in new cases in recent weeks, and both countries imposed fresh lockdown measures in early April. Brazil, India and Turkey are also suffering, with new daily cases reaching 75,000, 65,000 and 34,000 respectively by the end of Q1.
However, recent months have shown that the major consuming countries have become better at coping with Covid-19, and economic activity this year is still likely to bounce back strong from the weakness of early 2020, but the pace of growth will ease back in H2.
A slower recovery in mining
In mining, the recovery has been much slower. Latin America continues to report weakness in early 2021. In Chile, for example, copper output was down by 2.7% y/y in the first two months of this year due to falling ore grades and some virus-related difficulties. In Peru, data for January shows that copper was down 7.6% y/y, with zinc down 3.5% y/y due to Covid-19. Mining in South Africa is also still contracting.
We expect consumers to bounce back strongly in the months ahead, despite rising Covid cases, and producers will struggle to respond.
While this represents a tight fundamental picture, prices are likely to move broadly sideways as the reality of the demand recovery catches up with market expectations, which have already priced in a bullish story.
Dan Smith, Director Special Projects
Read Dan Smith’s Metals Megatrends 2035 Report.