Pressure on metals industry eases as momentum picks up in

With growth settling back to the roughly 2% pace prevailed during the decade-old economic expansion, fears of a global recession lessening, and the manufacturing cycle seemingly heading for a turnaround following a ‘phase one’ agreement between U.S. and China, the outlook for 2020 vis-à-vis economic growth, although limited, seemed positive.

Following a trough, global manufacturing returned to expansion. A third wave PMI bounce in the cycle, invoked investor optimism.

Consequent to the improved readings, metal prices, which typically move in tandem with PMIs; an index of the prevailing direction of economic trends in the manufacturing and service sectors, moved higher. Activity data portrayed that a global manufacturing recovery was indeed underway and expected to maintain its positive momentum into 2020.

The latter optimism was however short-lived, as the Covid-19 outbreak struck in Wuhan, Hubei province, China.

As it struggled to control the fast-spreading respiratory virus, China mandated factory shutdowns across most of its provinces. With Chinese authorities imposing restrictions on movement and businesses extending Lunar New Year shutdowns, China's output supply chain came to a standstill. New orders and employment fell at the steepest rates on record while exports shrank sharply on the back of shipping restrictions and order cancellations.

As one would expect, industries solely or partially reliant on China’s economy, and the country’s substantial demand for raw materials, for its manufacturing industry, took a beating. Notably, the lockdown and ensuing fall in demand for such raw materials spurred a sell-off within the industry, plummeting prices of industrial metals such as; copper, steel, and aluminium.

Reflecting the latter drop in prices, and the prevailing economic direction, in February, China reported significant drops in its leading indicators, specifically in the Manufacturing and Services PMIs. China’s Manufacturing PMI plunged to 40.3, the lowest level since the survey began in April 2004, and well below preliminary estimates of 45.7. As restrictions eased and more firms re-opened, China’s Manufacturing PMI rose to 50.1 in March from February’s record low, signalling a broad stabilization of business conditions.

Needless to say, as will the recovery in China, the combination of low prices and increasing global supply disruptions, triggered by governments imposing tighter restrictions to halt the spread of the deadly respiratory virus, may provide some support, potentially limiting downside and halting prices from falling into the depths of the 2008 economic and financial crisis.

Given that the recovery in China, and thus pick-up in demand is at this stage unknown, forecasting the demand-supply balance, is indeed no easy task to undertake. As things stand, supply is still likely to outstrip demand, setting up a challenging year for the metals and mining industry.

Albeit the latter pessimism, should China’s recovery gain momentum, and thus further mitigate the supply-demand imbalance, we expect metal prices to bolster, ultimately providing relief to the metals and mining industry.

Surely, the recent volatile markets have depressed prices. However, if one had to delve deeper and thus be very selective in terms of metals selected, one may indeed benefit from an upside in particular industries. Generous returns are surely in place.

We reiterate the importance of selecting companies that hold a sound balance sheet and the necessary liquidity to weather the current unprecedented times.

This article was issued by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. For more information visit, https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.