By Andy Home
LONDON- 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 percent (copper) to down 15 percent (tin) with aluminum, 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 synchronized 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 stabilization program 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 percent 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.
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. – Reuters