Why metals traders are upbeat

Summary: The world’s top professional metals traders remain optimistic, despite trade war jitters.

Key take-out: Most attendees at London Metals Week believe global growth will accelerate.

Trade-war jitters have rubbed the gloss off financial markets but not optimism in commodity markets for the year ahead, if the mood at this year’s London Metals Week is a guide.

A highlight on the calendar of professional metal traders, the week-long event features a series of lectures and social gatherings with Macquarie Bank’s base-metals outlook summit one of the best attended events.

But after the socialising came a survey of the year ahead, and while accuracy is not guaranteed, the 400 respondents do represent the collective wisdom of the metals market. This year, like last, the two top metals for the next 12-months are expected to be copper and nickel.

Before considering what the experts see, it is worth noting that last year’s survey was derailed by the outbreak of the China vs US tariff tiff. The same thing could happen again if the trade dispute makes a significant dent in global economic growth.

Copper, for example, had a strong start to 2018, rising to $US3.30 a pound, a trend which was in line with the London survey taken at this time in 2017. Then copper was sold off as trade worries mounted, with the price skidding to around $US2.65/lb.

Even at the latest price of $US2.79/lb copper is down 10 per cent on the price tip at last year’s London gathering, though that fall appears to have reinforced confidence in a copper recovery. Almost half (45 per cent) of respondents to the latest Macquarie survey see copper trending higher next year compared with 33 per cent at this time last year.

In other words, last’s year’s optimism might have been misplaced when looked at over the full 12-months, and it has been replaced by an even more optimistic outlook.

Nickel, the only metal to be trading higher now than where it was at last year’s London event, also has more positive support, with 31 per cent of delegates seeing the nickel price rising next year compared with 27 per cent last year.

What is perhaps more interesting than the optimistic view of copper and nickel is the drying up of pessimistic views. Just 5 per cent of survey respondents see the copper price falling next year compared with 23 per cent last year, while 8 per cent see nickel lower versus 11 per cent last year.

The mid-year sell-off in copper, according to the survey, was largely a result of speculative trading and is likely to be temporary. That’s an interesting view given that most people attending Metals Week are close to the market and are aware of what’s driving participants in the commodity market.

Apart from copper and nickel being seen as the winners in 2019 there are warnings for other metals, especially zinc. Delegates see it being hit by a flood of fresh supply, with 36 per cent seeing it as the best metal to sell short, followed by aluminium.

Interesting as the views are of delegates at the Macquarie outlook summit about specific metals, it is the bigger picture which could be more significant. That’s because metal traders see solid global economic growth next year, while questions about macro trends are also surprisingly upbeat given the trade war background.

More than 50 per cent of respondents see the global growth rate being the same next year as this year, though the number leaning towards stronger growth is well ahead of those leaning towards lower growth.

China, the world’s commodity sink, remains a major concern for the commodities sector. But a decline in growth (described as gravity taking hold) could still leave the Chinese growth rate next year at between 6 per cent and 7 per cent, with 54 per cent of respondents seeing growth moving below 6.5 per cent and 37 per cent tipping growth of between 6.5 per cent and 7 per cent.

If correct, the Chinese growth rate makes for an interesting comparison with the booming US economy, where growth is expected to top 3 per cent this year and next.

To put those growth rates of the world’s two biggest economies into perspective it’s worth considering their respective size because Chinese growth at 6 per cent on a $US12 trillion economy represents the creation of $US720 billion in new wealth while 3 per cent on the $US20 trillion US economy represents the creation of $US600 billion in new wealth.

The point about the growth rates, and even after allowing for China being a much more metal intensive economy, is that significant growth is expected in both countries even as the wage a damaging trade war.

For the broader commodities market, growth wherever it is achieved, boils down to a surprisingly positive outlook, which might explain the unexpected optimism of the metal traders in London this week.