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CRU warns most commodities have further to fall

The steelmaking value chain continues to favour iron-ore miners as prices remain elevated.

The steelmaking value chain continues to favour iron-ore miners as prices remain elevated.

25th May 2020

By: Mariaan Webb

Creamer Media Senior Deputy Editor Online

     

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As the economic fallout of governments’ responses to the Covid-19 pandemic is starting to be counted, commodity market analyst CRU has warned that the repercussions will be significant and that most commodities prices have not yet reached the bottom.

The coronavirus crisis has affected all markets and has made double-digit year-on-year commodity price falls the new reality, CRU analysts say in a ‘multi-commodity outlook’ insight, dated May 22.

It notes that the virus came at a time when there was cautious optimism that the trough of the commodity prices cycle had been reached. However, market optimism evaporated at the start of 2020 when the new coronavirus emerged in China – the world’s top commodities consumer. The government-imposed lockdowns in major economies around the world that followed, further dragged down prices.

“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,” CRU states.

While gold and iron-ore prices remain high during the pandemic, other metals have plummeted as the world economy heads for a recession.

CRU estimates that copper demand will decline 5% this year – its 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.”

Copper prices could fall to $4 000/t during the second quarter, but CRU has set its 2020 forecast at $5 216/t – down 13% from the 2019 average of $6 017/t.

For aluminium, CRU is forecasting the LME three-month price to fall to $1 360/t in the third quarter. As smelters close and inventories are drawn down over the next few years, prices will gradually recover.  However, it expects the aluminium price will only return to 2019 levels in 2023. Aluminium averaged $1 811/t in 2019 and is forecast to fall 17.7% to an average of $1 490/t in 2020.

“Nearly all Chinese smelters are profitable. Outside China, 16% of smelters are losing money. Margins will worsen in the next three quarters, delivering the closures the market requires.”

In the steel-value chain, iron-ore remains resilient and is currently trading at $84/t. The premium hard coking coal (HCC) price, in contrast, has fallen to below $110/t as buying interest outside China remains weak.

“We estimate that the absolute floor price for premium HCC is $95/t FOB Australia,” CRU says.

Its 2020 forecast for iron-ore is a 13.9% year-on-year decrease at $80/t and for HCC it is a 15.9% year-on-year decrease.

For safe-haven asset gold, the macroeconomic background remains favourable and CRU says the price will average $1 640/oz in 2020. That is a 17.7% improvement on the average of $1 393/t.

With many economies around the world still in lockdown, CRU uses China to gauge the economic cost of the Covid-19 containment and stresses that the “economic repercussions will be significant”.

China has reported its first gross domestic production (GDP) contraction since the start of economic reforms in 1978, with negative first-quarter growth of 6.8% year-on-year and 9.8% quarter-on-quarter.

CRU calculates that one month of lockdown lowers the level of yearly GDP by 2% to 3%.

“CRU is now forecasting a global recession in 2020, with growth in the Eurozone and US turning negative, and China suffering a ‘hard landing’, with China’s economic growth slowing to just 1.6%.”

Edited by Creamer Media Reporter

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