Base metal prices are rising due to the rebound in Chinese demand
Supported by strong Chinese demand and concerns about global supply, industrial metals are expected to be among the best performing assets in 2020.
As of last Friday, the Morgan Stanley Capital International Industrial Metals Index, which tracks the prices of metals such as copper, nickel and aluminum, has risen 21.4% so far this year, only slightly lower than the 21.9% increase in the precious metals index. The Standard & Poor's GSCI index, which measures the prices of metals, agricultural products and energy-related commodities, fell nearly 10%.
The increase in copper prices this year is not only due to the economic strength of China, the largest metal consumer, but also because it plays an important role in emerging technologies such as electric vehicles and renewable green energy.
However, this year's most popular major commodity is non-iron ore. In 2020, the price of iron ore, a raw material for steelmaking, has risen by nearly 70%. The price of iron ore futures on the Singapore Exchange exceeded US$155 per ton last Friday. This is the first time since the contract was launched in 2013.
The core of this wave of iron ore prices is the rapid increase in global factory activity. According to the leading demand indicator-Monthly Purchasing Managers Index (PMI), in November, many countries' manufacturing sectors were in expansion mode.
But the most striking is China. China is now the only major economy that has experienced a strong recovery after the recession triggered by the coronavirus pandemic.
In contrast, the recovery momentum in the United States is good, but there is still a long way to go before the epidemic. As of November, the number of jobs in the United States was still nearly 10 million fewer than the peak in February.
The momentum for price increases is still sufficient
I personally believe that this rebound in base metal prices has just begun, and asset prices may be higher in 2021 for several reasons.
First of all, President-elect Biden plans to make infrastructure construction one of his top priorities after taking office next month. According to the proposal, the United States will invest up to 2 trillion US dollars not only to improve roads, bridges and seaports, but also to strengthen the electric vehicle industry, increase charging stations, transform school buses into zero emissions, and so on.
According to Reuters, Biden's plan may attract private investment such as pension funds and insurance investment into the infrastructure sector, which may support the base metal market.
The second major reason is related to the new round of stimulus plan and the inflation caused by money printing. Last week, Ray Dalio, the legendary fund manager of Bridgewater Associates, held a questioning event on Reddit. At the event, he said that the flood of funds and credit is unlikely to subside next year. The billionaire investor stated that, therefore, asset prices will not fall as measured by depreciated currency values.
In other words, all these funds need to flow elsewhere, including base metals and other commodities.
The US Congress is currently considering a $908 billion economic stimulus bill. According to "Barron's Weekly" report, Gita Gopinath, chief economist of the International Monetary Fund (IMF), is urging Congress to pass a bailout package, which will benefit commodities even at the risk of increasing inflation.
You know, the Fed now seems no longer interested in curbing inflation. In August of this year, Fed Chairman Jerome Powell announced a new policy approach that would allow inflation to remain at an average level of 2% over time, which means that monthly price increases can be tolerated.
