the end of the goods
AutoAfter college, my first car was a Toyota Corolla hatchback. The engine was a very well designed piece of machinery. I wish I could say the same for the body panels, which quickly took on the look of rusty Swiss cheese; the holes widen year by year.
Thanks to such episodes, car manufacturers began to use galvanized steel: body panels were “hot-dipped” in a molten bath of corrosion-resistant zinc.
But auto companies in two of the world’s most populous countries didn’t get that memo. At least not until recently.
The result? A massive bull stampede in the zinc market at a time when many of the world’s top analysts least expected it…
Bloomberg’s The recent headline “China’s Rusty Cars Set to Hold Rally for 2016 Top Metal” says it all. The same is true of the reaction of zinc prices, which are up 60% since the beginning of this year.
Only about a third of the 19 million cars and trucks made in China last year were built with galvanized steel.
It’s more or less the same in India, where consumers bought a record 2 million vehicles last year; only about 20% were made from galvanized steel, according to India’s Bombay Institute of Technology.
When you think of the forecasted vehicle sales in either country for 2020 (24 million in China, 5 million in India), that’s a lot of zinc.
Don’t look now, but…
My point is not to run out and buy zinc mining stocks. It’s just to point out that demand for staples often materializes in ways no one expects until rising prices make it all too obvious.
Take a look at what’s going on with nickel.
The Philippines is a major supplier of raw nickel ore. Duterte’s new government, which took office over the summer, is in the midst of a “review” of the country’s roughly three dozen mines, threatening to put some out of service for alleged environmental violations.
That’s not exactly “love,” but it certainly helps the case for loving the ongoing run in nickel prices. UBS Group AG analysts expect nickel prices to rise another 25% next year (after rising 20% so far this year).
Of all the major industrial metals, copper is one of the most closely watched. The price of the red metal barely moved throughout the year. It’s down 50% since 2011.
However, Japan’s largest producer, Pan Pacific Copper, sees the price rising 40% to about $7,000 a ton by the time 2020 rolls around. Citigroup recently made a similar forecast. Why?
It’s all about supply and demand.
Demand for copper has remained relatively firm, even though economic growth in China, the world’s top copper consumer, has slowed in recent years.
But the supply of copper is another matter entirely.
Late last year, Glencore, one of the world’s largest copper miners, decided to suspend its largest mines in Africa, removing up to 400,000 tons of copper production from the global market. In Chile, the world’s largest copper supplier, the state copper commission announced big investment cuts through 2025, eliminating eight mine development projects worth nearly $23 billion.
Now you can see where these copper price projections come from. At Citigroup, analysts see growing deficits between copper supply and demand. At the aforementioned Pan Pacific Copper, the company’s president said: “Production will not be able to keep up with demand due to the absence of new mine supply, unless prices reach $7,000 [per ton].”
With the price of copper below $5,000 a ton right now, that provides plenty of scope for potential profit, and yet another reason to keep a close eye on this “most hated” commodity class.