By Alex Kimani
- The rally in energy commodities has calmed down somewhat at the end of 2021, but base metal prices remain stubbornly high
- According to the analysts, prices for copper, nickel, cobalt, and lithium could reach historical peaks for an unprecedented, sustained period
- In a net-zero emissions scenario, the metals demand boom could lead to a more than fourfold increase in the value of metals production
Long-suffering Americans grappling with historic levels of inflation are finally enjoying some reprieve. After a relentless climb, prices at the pump have been heading south, with national average gas prices tumbling to a seven-week low of $3.35 a gallon, according to AAA.
Fuel prices started leveling out after President Joe Biden announced on Nov. 23, the biggest-ever release from the Strategic Petroleum Reserve, though experts have labeled it as a mere band-aid.
Meanwhile, the natural gas rally cooled off considerably in recent weeks.
In early October, natural gas hit $6.47 per million British thermal units, representing the highest level since February 2014. However, that rally has completely reversed, with gas prices falling another 11.5% on Monday to $3.66 per million BTU, the lowest level since July 15.
The torrid rally has come to a screeching halt in part due to the fact that temperatures across the United States have been warmer than usual, thus easing cooling demand.
The energy sticker shock has been one of the biggest drivers behind record inflation levels, and cooling energy prices will go some way to lowering inflationary pressure.
"This is going to help consumers considerably," Robert Yawger, director of energy futures at Mizuho Securities, told CNN.
The same can, however, hardly be said about other commodities, particularly metals.
After a broad rally in the current year, prices of most base metals have remained stubbornly high, with experts predicting more of the same in the coming year.
In a note from Jefferies entitled: "Same old song and dance for 2022,"
"We are bullish on mining for 2022 based on fundamental factors and valuations. We are most constructive on the base metals, and especially copper and aluminum, while we are most cautious on iron ore and coal."
Jefferies has forecast a massive shift in Chinese demand, with the old drivers of Chinese economic growth set to go into decline, while demand from the new economy sector rises.
"We expect changes in the Chinese economy to lead to a shift from steel, iron ore and coal to copper, nickel, aluminum, and other 'energy transition' metals."
Jefferies' views align with those by Eurasia Review analysts who have predicted that metals that power the new economy will soon become more valuable than the oil industry.
According to the analysts, prices for copper, nickel, cobalt, and lithium could reach historical peaks for an unprecedented, sustained period in a net-zero emissions scenario, with the total value of production rising more than four-fold for the period 2021-2040, and even rivaling the total value of crude oil production.
In a net-zero emissions scenario, the metals demand boom could lead to a more than fourfold increase in the value of metals production–totaling $13 trillion accumulated over the next two decades for the four metals alone. This could rival the estimated value of oil production in a net-zero emissions scenario over that same period, making the four metals macro-relevant for inflation, trade, and output, and providing significant windfalls to commodity producers.
Here is the broad outlook for aluminum and copper.
Aluminum
Aluminum prices recently hit 13-year highs on the London Metal Exchange Index (LME) and the Shanghai Futures Exchange (SHFE). On Dec. 7, aluminum was quoted at $2,625.00 per metric ton, a slight fall from $2,641.41/MT average for November.
Despite the recent strong price gains, Standard Chartered analysts see prices with an upside bias, with the long tally of supply disruptions in China and rising concerns over the trajectory of future supply growth amid more stringent energy and emissions target reviews.
In addition to the power shortages in China and policy curbs, the latest disruption to roil the aluminum market this week was the coup in Guinea, the world's second-largest bauxite producer, and largest exporter. China is the key export destination of Guinean bauxite, accounting for 55% of China's bauxite imports.
On a regional basis, physical premiums remain elevated on firm demand and the rise in freight costs, with the U.S. Midwest premium hovering around 36 cents/lb through August and into early September, thanks to the strike at the Kitimat smelter.
European premiums stand at an even more impressive 375/t, the highest since February 2015. However, LME aluminum inventories remain quite low at 1.33 million tonnes (Mt). Meanwhile, SHFE aluminum inventories are at their lowest since Jan. 1, making room for another aluminum rally.
Copper
Jefferies says they overestimated 2021 copper mine supply by 500kt, and expect copper production to fall short of expectations again in 2022, warning that the "long-awaited tsunami of supply" could fail to materialize.
"We expect copper production misses combined with rising demand to lead to higher prices."
The analysts say other base metals and Platinum Group Metals should also benefit from improving demand and constrained supply.
Robust demand from the Middle Kingdom should provide further support.
Copper prices have been rallying after the People's Bank of China on Monday said it would cut the amount of cash that banks must hold as reserves, releasing the funds in long-term liquidity to bolster slowing economic growth.
China's copper imports rose for a third straight month in November, customs data showed, hitting their highest level since March as demand kicked back in following the easing of a power crunch that had dented industrial production. Imports climbed 31.7% in November, well above a forecast for a 20.6% gain. Benchmark three-month copper on the London Metal Exchange (LME) was quoted at $9,562 a tonne on Monday.
Standard Chartered has provided a base commodities outlook as follows:
