Global Commodities in 2021: China, Protectionism and Green Stimulus
- Keywords:
- commodities
- metals
- china
For all the ups and downs of the commodities markets over the years, there's never been a year quite like this.
To get a perspective on the global side of commodities, I recently spoke with Colin Hamilton, Managing Director, BMO Commodities Research. We discussed supply and demand dynamics, China’s influence on metals markets and how green development could impact the industry.
Following is a summary of our discussion, edited for length and clarity.
Supply-Demand Alignment
In Hamilton’s 20 years of covering commodities markets, he said he’s never experienced an environment where demand forecasts change so quickly. But that’s the nature of our current situation, in which after a sharp downturn, copper is at its highest levels since 2014, there's strong momentum in aluminum, and some PGM [platinum group metals] prices for the automotive industry are also at all-time highs.
“If we were sitting here one year ago, and we said we're going to go through second-biggest industrial downturn this century, would we have guessed that the prices would be at these levels? Probably not,” Hamilton said. "What we've seen is still an environment where global demand will have fallen this year, but we've also seen the strength of a sequential recovery. It's really been a metals-intensive recovery we've seen come across the world. And with that, what we're now trying to do in these markets is incentivize supply. We cut off a lot of suppliers—we did in U.S. hot-rolled coil earlier in the year—but now we're at a point where we're trying to get material back in the market.”
China Imports
Global manufacturing is once again expanding. In April, all countries on the Global Purchasing Managers’ Index were contracting; now, 80% are expanding. It's a global recovery, but Hamilton said one country in particular led the way.
“It's not too much of a stretch to say China saved the metals markets this year,” he said. “Just as we've seen in past downcycles when the rest of the world didn't want commodities, China stepped in, and the price was right for very opportunistic buying earlier in the year. But what it meant was when we saw these surging refined copper imports and we saw China as a net importer of steel and aluminum, which is something we haven't seen for 10 years, that really did absorb the excess in the market, which prevented the price drops, prevented the aggressive supply closures that we were perhaps feeling earlier on.”
Hamilton added that the China-fueled recovery is expanding to other Asian economies, and it’s expected to carry over to industrial production in Europe and the U.S. throughout 2021.
The New Protectionism
With a new administration set to take over in the U.S., the focus has once again turned to the issue of trade. I asked Hamilton if he thought the world is moving toward an environment of more protectionist-driven regional trading blocks. He said governments around the globe are trying to protect their own industries and jobs within their countries and that, once again, it’s China taking the lead.
“I think China on its own is getting a little bit more protectionist,” he said. “You're seeing China basically restrict imports of many commodities at the current time. I think this is a bit of a pilot project, but you may see more of that. And if China does it well, you're going to see a lot of other economies do the same. And carbon borders, as well, are effectively using the environment as a protectionist policy, so expect to see a bit more of that. It does lead to more regional pricing and with that, it does create arbitrage opportunities.”
Green Impacts
As we turn into the phase of post-COVID-19 recovery in 2021, governments around the are world trying to figure out the best ways to boost their economies. Infrastructure programs, particularly in the U.S., are notoriously difficult to pass. But green stimulus has proven to be popular among the younger demographics, and we’ve seen the success such efforts have had in China.
Hamilton pointed out that the energy mix in green projects is becoming increasingly metals intensive. Solar projects, for example, rely more heavily on base metals than traditional utilities, while offshore wind requires a lot of copper cabling.
Meanwhile, the global metals and mining industry itself is under pressure to reduce its carbon footprint. Hamilton noted that the quickest and easiest way to accomplish that is to adopt the U.S. model of blending more scrap into the mix.
“What you've seen is cumulative corporate steel and aluminum consumption growing over the past number of years, and that is all available to be recycled at a certain time,” he said. “We expect to see strong growth, perhaps high single-digit growth, in global scrap generation over the coming years. That's not just in China—the developed world is pushing carbon borders. With that, scrap becomes a lot more strategic than perhaps it has been over the past few years.”
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Andrew Pappas
Managing Director, Team Leader and Head of ABL Metals Group
Andrew is a Managing Director / Team Leader and Head of Asset Based Lending (ABL) Metals within the ABL Group of BMO Commercial Bank since 2011. Currently, Andrew o…(..)
View Full Profile >For all the ups and downs of the commodities markets over the years, there's never been a year quite like this.
To get a perspective on the global side of commodities, I recently spoke with Colin Hamilton, Managing Director, BMO Commodities Research. We discussed supply and demand dynamics, China’s influence on metals markets and how green development could impact the industry.
Following is a summary of our discussion, edited for length and clarity.
Supply-Demand Alignment
In Hamilton’s 20 years of covering commodities markets, he said he’s never experienced an environment where demand forecasts change so quickly. But that’s the nature of our current situation, in which after a sharp downturn, copper is at its highest levels since 2014, there's strong momentum in aluminum, and some PGM [platinum group metals] prices for the automotive industry are also at all-time highs.
“If we were sitting here one year ago, and we said we're going to go through second-biggest industrial downturn this century, would we have guessed that the prices would be at these levels? Probably not,” Hamilton said. "What we've seen is still an environment where global demand will have fallen this year, but we've also seen the strength of a sequential recovery. It's really been a metals-intensive recovery we've seen come across the world. And with that, what we're now trying to do in these markets is incentivize supply. We cut off a lot of suppliers—we did in U.S. hot-rolled coil earlier in the year—but now we're at a point where we're trying to get material back in the market.”
China Imports
Global manufacturing is once again expanding. In April, all countries on the Global Purchasing Managers’ Index were contracting; now, 80% are expanding. It's a global recovery, but Hamilton said one country in particular led the way.
“It's not too much of a stretch to say China saved the metals markets this year,” he said. “Just as we've seen in past downcycles when the rest of the world didn't want commodities, China stepped in, and the price was right for very opportunistic buying earlier in the year. But what it meant was when we saw these surging refined copper imports and we saw China as a net importer of steel and aluminum, which is something we haven't seen for 10 years, that really did absorb the excess in the market, which prevented the price drops, prevented the aggressive supply closures that we were perhaps feeling earlier on.”
Hamilton added that the China-fueled recovery is expanding to other Asian economies, and it’s expected to carry over to industrial production in Europe and the U.S. throughout 2021.
The New Protectionism
With a new administration set to take over in the U.S., the focus has once again turned to the issue of trade. I asked Hamilton if he thought the world is moving toward an environment of more protectionist-driven regional trading blocks. He said governments around the globe are trying to protect their own industries and jobs within their countries and that, once again, it’s China taking the lead.
“I think China on its own is getting a little bit more protectionist,” he said. “You're seeing China basically restrict imports of many commodities at the current time. I think this is a bit of a pilot project, but you may see more of that. And if China does it well, you're going to see a lot of other economies do the same. And carbon borders, as well, are effectively using the environment as a protectionist policy, so expect to see a bit more of that. It does lead to more regional pricing and with that, it does create arbitrage opportunities.”
Green Impacts
As we turn into the phase of post-COVID-19 recovery in 2021, governments around the are world trying to figure out the best ways to boost their economies. Infrastructure programs, particularly in the U.S., are notoriously difficult to pass. But green stimulus has proven to be popular among the younger demographics, and we’ve seen the success such efforts have had in China.
Hamilton pointed out that the energy mix in green projects is becoming increasingly metals intensive. Solar projects, for example, rely more heavily on base metals than traditional utilities, while offshore wind requires a lot of copper cabling.
Meanwhile, the global metals and mining industry itself is under pressure to reduce its carbon footprint. Hamilton noted that the quickest and easiest way to accomplish that is to adopt the U.S. model of blending more scrap into the mix.
“What you've seen is cumulative corporate steel and aluminum consumption growing over the past number of years, and that is all available to be recycled at a certain time,” he said. “We expect to see strong growth, perhaps high single-digit growth, in global scrap generation over the coming years. That's not just in China—the developed world is pushing carbon borders. With that, scrap becomes a lot more strategic than perhaps it has been over the past few years.”
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