Metals upswing hangs on US-China trade truce

London

A THAWING in the US-China trade war could fuel a rally in base metals in 2020 after the prolonged conflict largely kept a lid on prices in 2019.

Global growth was hobbled by the two-year dispute, including in China, which accounts for about half of metals consumption and is the world's second-largest economy.

The conflict showed signs of easing after a "Phase One" deal was agreed last month between Washington and Beijing. That sent copper, often seen as a gauge of economic health, to its biggest monthly gain in two years.

A string of upbeat data from China has also inspired confidence in base metals' demand, including Tuesday's numbers showing manufacturing activity in China expanded for a second consecutive month in December.

However, risks remain, said Saxo Bank commodities strategist Ole Hansen, adding that the trade deal has yet to be signed and both sides must live up to the conditions of the agreement.

An improvement in the macroeconomic picture is expected to boost underlying metals consumption by the second quarter of 2020, Citi analysts said.

Benchmark copper on the London Metal Exchange (LME) finished the year with a 3.4 per cent gain, recovering from a decline of nearly 18 per cent in 2018. It closed about 16 per cent lower than at the end of the previous decade.

The metal used in power and construction ended 0.7 per cent down at US$6,175 a tonne on New Year's Eve as investors booked profits from a rally sparked by the easing trade tensions.

The index of the six main industrial metals on the LME rose 2.4 per cent last year, led by nickel and copper.

By far, the best performer among LME metals over the past 12 months has been nickel. The metal is on track for its strongest year in a decade, lifted by an expedited ban on nickel ore exports from Indonesia from Jan 1, 2020.

The stainless steel ingredient's strength on the back of a supply deficit has been undermined by weakness in the stainless steel market and a surge in inventories from hidden stocks.

In LME-approved warehouses last year, nickel inventories were down 27 per cent, lead stocks gained 40 per cent and zinc stocks have dropped by 60 per cent. Nickel jumped 31 per cent in 2019 and touched a five-year high in September. The metal ended Tuesday's session down 2 per cent at US$14,025 a tonne.

A transition to cleaner energy will take centre stage in metals over the coming years, requiring significantly larger amounts of copper, nickel and other metals.

"We need to start accelerating projects and discovery of resources if we are to hit any of the carbon (reduction) targets set out," said Julian Kettle, vice-chairman of metals and mining at research and consultancy company Wood Mackenzie.

In other metals, aluminium capped off the year with a 0.9 per cent decline to US$1,810, clocking an annual loss of about 2 per cent.

Zinc was down 7.8 per cent on the year after ceding 1.5 per cent to US$2,272 on Tuesday.

Lead eased 4.9 per cent in 2019 despite supply disruptions at major smelters, ending the session 0.8 per cent lower at US$1,927. REUTERS