Base metals are enjoying greater investor popularity as global demand is about to take off. Prices of gold and silver are expected to be squeezed as a result.
Price rises sparked by economic growth in the United States and China
Favourable economic developments in China and the United States are providing a significant shot in the arm to metals prices, with industrial metals among the second quarter’s best performers. The price of nickel, in particular, has shot up by well over 20 per cent. We continue to take a sanguine view of the base metals outlook.
Precious metals prices set to fall as demand contracts
In the second quarter, precious metals staged another strong increase but we don’t expect this to last into the second half of the year, as gold and silver prices in particular are feeling the pinch of a combination of higher interest rates in the United States, relatively little fear of inflation and a higher US dollar. We expect these gold price trends to continue into 2014 and 2015, and not to stabilise until 2016 when demand should pick up. Platinum and palladium are likely to be less affected as long as industrial demand and car sales retain their momentum. That said, a renewed sell-off in gold might well put severe pressure on platinum and palladium prices as many investors still have major holdings of these precious metals.
Base metals prices supported by upbeat sentiment
Accelerating global growth has helped improve conditions in most base metals markets, and investors have become a lot less jittery with the announcement of robust macroeconomic data on the Chinese and US economies early in July. China is likely to introduce additional stimulus measures to help it achieve its economic growth target of 7.5 per cent for 2014, and the demand for base metals should benefit. The prospect of a demand pick-up has had investors piling into base metals, and we would rate aluminium and zinc as the two crown jewels among these. By contrast, most markets for ferrous metals – steel, iron ore and coking coal – report persistently weak prices, mainly as a result of overcapacity. Global prices for flat-rolled steel have come down by 3 per cent since early 2014, while steel prices recorded double-digit falls. At this point in time, there is plenty of iron ore to go around to meet demand in the global market and oversupply is heavily squeezing prices. In the market for coking coal, supply is outstripping demand, and only mine closures and significant capacity cuts could make prices recover now.