Well, at least there was nickel.
Looking back on 2019 it was nickel that provided most of the thrills and a fair share of the spills in the base metals complex.
The rest of the London Metal Exchange pack was largely moribund. Full-year performances ranged from up 5% (copper) to down 15% (tin) with aluminium, zinc and lead closing December barely changed from the start of January.
The obvious culprit for such a subdued performance was President Trump, given the pervasive uncertainty generated by the United States’ trade stand-off with China.
But deal-or-no-deal uncertainty simply added to the markets’ core malaise, namely the weakest synchronised demand performance since the bad old days of 2008-2009.
Usage flat-lined or fell across the metallic board with, again, the single exception of nickel. Lest electric vehicles bulls get too excited, nickel benefited not from its use in lithium-ion battery chemistry but from China’s super-strong stainless steel sector.
Broad-based manufacturing weakness kept the metals in check last year.
Most analysts are looking for something better this year but the early indications are that bulls will have to be patient.
China has accounted for much of the growth in global metals demand in recent years so it should be no surprise that the country’s stuttering manufacturing sector was the single most important headwind for base metals last year.
China’s official manufacturing purchasing managers index (PMI) spent much of 2019 below 50, the threshold reading dividing expansion from contraction.
The PMI turned positive in November and stayed positive in December with a reading of 50.2 in both months.
The alternative Caixin PMI, which captures activity among medium-sized and smaller companies, recovered earlier with December’s reading of 51.5 denoting a fifth consecutive month of expansion.
Relative to years past these are still subdued rates of implied growth but after last year’s dismal performance metals traders will take any growth at all as a net positive.
The so-called “Phase 1” trade agreement with the United States, promising at the very least no further tariff escalation, has helped improve sentiment.
But the expansion in manufacturing activity is also the result of Beijing’s ongoing stimulus package.
This is no shock-and-awe investment splurge such as seen in 2010 or 2016 but rather a more targeted stabilisation programme aimed at preventing a broader slowdown in economic growth.
China’s leaders are promising more of the same in 2020 with a stated aim of keeping growth around 6% through infrastructure investment.
It’s worth remembering that what’s good for China is good for the rest of Asia, given regional raw material and finished good trade flows.
South Korea’s manufacturing sector, for example, also returned to growth in December after seven consecutive months of contraction. The key turnaround was a jump in new export orders.
European gloom, US downturn
Signs of renewed growth in China’s manufacturing activity are a major positive for base metals demand and by implication prices this year.
However, eastern promise is tempered by continued dark clouds in the west.
Europe’s manufacturing sector had a miserable 2019 with little sign of any imminent turnaround.
Activity in the euro zone contracted for an 11th month in December, the IHS Markit manufacturing PMI sliding to 46.3 from November’s 46.9.
The protracted weakness in Europe is part cyclical but also part structural with the automotive sector, a key manufacturing pillar in countries such as Germany, struggling to cope with tighter emissions standards and the resulting need to switch to mass production of electric vehicles. It’s proving to be a bumpy road.
The December PMI captured a slight improvement in sentiment but IHS Markit’s chief economist Chris Williamson said “a return to growth remains a long way off given that new order flows continued to fall at one of the fastest rates seen over the past seven years.”
The United States’ manufacturing sector was one of the main bright spots in the first half of last year but there are worrying signs of a sharp slowdown.
The Institute for Supply Management’s PMI slid to 47.2 last month from 48.1 in November. It was the fifth month of straight contraction and December’s number suggested that factory output is now slumping at its fastest rate since 2009.
There may be one-off factors at work, such as Boeing’s decision to cease production of its 737 Max jetliner in the wake of two crashes. It was certainly noticeable that transportation equipment was one of the weakest industrial sectors last month.
Moreover, the scale of the downturn implied by the fast-falling PMI doesn’t tally well with continued positive signs from the construction and automotive sectors, both key metallic demand drivers.
However, together with ongoing weakness in Europe, the latest ISM survey suggests the world is still some way from the sort of synchronised growth that would lift metals such as copper and aluminium.
Of course the Phase 1 deal between the United States and China could be a major boost for both countries’ manufacturing sectors.
Whether there is ever going to be a “Phase 2” deal is a moot point but at the very least there is a sense that we may have passed the point of peak tariffs.
A renewed sense of optimism has been evident in the sharp turnaround in fund positioning on copper, as ever the metallic bellwether for the risk-on-risk-off trade.
The money men held a net collective short on the CME copper contract for most of 2019 but turned net long in the last days of the year.
Mind you, the last report from the Commodity Futures Trading Commission covered positions as of Dec. 31, since when global political tensions have reignited after the U.S. drone strike on Iran’s General Qassem Soleimani.
One major source of uncertainty may have been removed but it has quickly been replaced with another, witness the ensuing jump in oil prices.
If that means more price volatility in industrial metals, many traders will welcome it after last year’s turgid performance.
And if all else fails, there’s still always nickel for a bit of excitement.