The end of the goods
After college, my first car was a Toyota Corolla hatchback. The engine was a very well designed piece of machinery. I wish I could say the same for the body panels, which quickly took on the look of rusty Swiss cheese; the holes widen year after year.
Thanks to such episodes, automobile manufacturers began to use galvanized steel: the body panels were “hot dipped” in a molten bath of corrosion-resistant zinc.
But auto companies in two of the world’s most populous countries didn’t get that memo. At least not until recently.
The result? A huge bullish stampede in the zinc market at a time when many of the world’s leading analysts least expected it…
by Bloomberg The recent headline “China’s Rusting Cars Set to Hold Rally for 2016 Top Metal” says it all. The same goes for the reaction of zinc prices, which are up 60% since the beginning of this year.
Only about a third of the 19 million cars and trucks made in China last year were built with galvanized steel.
It’s much the same in India, where consumers bought a record 2 million vehicles last year; only about 20% were made from galvanized steel, according to India’s Bombay Institute of Technology.
When you think of the vehicle sales forecasts in any of the countries for 2020 (24 million in China, 5 million in India), that’s a lot of zinc.
Don’t look now, but…
My point is not to run out and buy zinc mining stocks. It’s just to point out that commodity demand often materializes in ways no one expects until rising prices make it all too obvious.
Take a look at what’s going on with nickel.
The Philippines is a major supplier of raw nickel ore. Duterte’s new government, which took office over the summer, is in the midst of a “review” of the country’s roughly three dozen mines, threatening to take some out of service for alleged environmental violations.
That’s not exactly “love,” but it certainly helps the case for loving the ongoing run in nickel prices. Analysts at UBS Group AG expect nickel prices to rise another 25% next year (after rising 20% year-to-date).
Of all the major industrial metals, copper is one of the most closely watched. The price of the red metal hardly moved throughout the year. It’s down 50% since 2011.
However, Japan’s largest producer, Pan Pacific Copper, sees the price rising 40% to about $7,000 a tonne by the time 2020 rolls around. Citigroup recently made a similar forecast. Why?
It’s about supply and demand.
Copper demand has remained relatively strong, even though economic growth in China, the world’s top copper consumer, has slowed in recent years.
But copper supply is another matter entirely.
Late last year, Glencore, one of the world’s largest copper miners, decided to suspend its largest mines in Africa, withdrawing up to 400,000 tonnes of copper production from the global market. In Chile, the world’s largest supplier of copper, the state copper commission announced big investment cuts through 2025, scrapping eight mine development projects worth nearly $23 billion.
Now you can see where these copper price projections are coming from. At Citigroup, analysts see widening deficits between copper supply and demand. At the aforementioned Pan Pacific Copper, the company’s president said: “Production will not be able to keep pace with demand due to the absence of new mining supply, unless prices reach $7,000 [per ton].”
With the price of copper below $5,000 a ton right now, that provides plenty of room for potential profit, and yet another reason to keep a close eye on this class of “most hated” commodities.