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CRU Commodity Outlook

Metal News - Published on Tue, 26 May 2020

Image Source: Copper Aluminium Coronavirus COVID19
Research house CRU said that “Over Q1 2020, Covid-19 has developed from an emerging threat to a transformational reality with potentially long-lasting effects on economic growth. All optimism for commodity markets at the start of the year was quickly extinguished as the coronavirus emerged in Wuhan, China. Prices have been dragged down further by dire market fundamentals which were a result of government-imposed lockdowns in the major global economies. Both supply and demand have been lowered across the board, but demand has been harder hit and will be slower to make a recovery. Most commodities have further to fall from here. There has been a profound human cost to the pandemic and the economic fallout of governments’ responses is just starting to be counted.”

China’s published a GDP growth rate of -6.8% y/y in Q1 2020 and -9.8% QoQ. This is the first negative growth figure since the start of the economic reforms initiated by Deng Xiaoping in 1978. This number is not surprising given the lockdown brought the economy near to a standstill for almost two months. China’s growth rate bears particular significance for commodity markets as its economy has come to account for roughly half of global commodity consumption and production. Furthermore, with many economies around the world still in lockdown, we are looking to China to gauge the economic cost of the Covid-19 containment. The economic repercussions will be significant. At the beginning of May, many economies were starting to lift lockdowns or at least discuss exit strategies, with the caveat that we are entering a ‘new normal’. CRU is assessing the full economic impact of bringing swaths of the global economy to a standstill. Using estimates of the loss of output by sector, one month of the lockdown lowers the level of annual GDP by 2–3%. CRU is now forecasting a global recession in 2020, with growth in the Eurozone and USA turning negative, and China suffering a “hard landing”, with China’s economic growth slowing to just 1.6%.

Automotive hit hard during troubling times for OEMs - While construction and automotive, two key end-use markets for metals, have both seen activity has slow substantially because of the lockdowns the two sectors have fared quite differently. Construction has slowed, with significant divergence between countries, but the majority of sites continued to operate. CRU expects that global construction output will contract by 1.9% this year and then recover to 6.2% in 2021. By contrast, the automotive sector has been hit especially hard. CRU forecasts the global auto industry will contract by a massive 15.9% in 2020. The European Car Manufacturers’ Association estimates that across the EU shutdowns have resulted in the lost production of more than 2 million units. Car sales dropped by more than 50% across EU during March. CRU expects EU automotive production to contract by 21.6% in 2020. Despite China’s announced a policy stimulus to support the auto industry on 31 March, which included a reduction in VAT, with the focus of EVs. CRU expects Chinese auto production will contract by 10.5% this year. North America car sales in April were -16% YoY and assembly restarts are expected to come in May. Auto demand will largely depend on what the second stimulus will look like and how the US government steps in to help. CRU forecast North American vehicle production will contract by 19.6% in 2020.

Prices driven to new lows as market fundamentals take hold - Optimism for commodity prices at the start of the year was quickly extinguished and prices were dragged down as the emergence of coronavirus in Wuhan spread into a global pandemic. In an environment of macroeconomic uncertainty, LME prices have declined, and safe-haven assets such as gold have flourished. The steelmaking value chain continues to favour iron ore miners as prices remain elevated, due largely to supply losses and low shipping costs. The steel industry is experiencing extremely weak downstream demand, resulting in a rapid stock build.

Copper sees steepest demand decline since the 70s - Copper demand is set to decline by over 5% this year, which represents the strongest downturn since the mid-1970s. Without price-related cuts, copper faces considerable market surpluses over the next five years and the much-vaunted medium-term structural deficit story appears vanished or at least pushed much further out into the future. There is scope for some retracement of the copper price into the $4,000s/t during the second quarter but the period average is set at just over $5,000/t. Any price appreciation over the remainder of the year and 2021 will be capped by the cash costs net of by-product for the 90th percentile mine.

The aluminium market is in crisis - Given the steep declines in demand from almost all end-use sectors, the aluminium market would have faced a 6 Mt global surplus without smelter closures. Chinese smelters are under pressure and curtailments are happening. Given the need for closures, CRU is forecasting the LME 3-month price will fall to $1,360/t in Q3 2020. As closures happen, inventories will be drawn down but only over the next few years, allowing prices to gradually recover. The aluminium price is only expected to return to 2019 levels in 2023. Still, nearly all Chinese smelters are profitable. Outside China, 16% of smelters are losing money. Margins will worsen in the next quarters delivering the closures the market requires.

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Posted By : Yogender Pancholi on Tue, 26 May 2020
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