Miners have watched iron ore sink precipitously this year to a five-year low. That has been repeated for oil and coal, as expectations of global demand have weakened.
Yet despite slower growth in China, the world’s largest consumer of commodities, analysts say demand remains robust for some industrial metals, which are set to benefit from any long-term shift towards more private investment and consumption.
The benchmark Standard & Poor’s GSCI Commodity Index has fallen 23 per cent from a peak in June, making the past five months the weakest period for commodity prices since the onset of the financial crisis, according to Barclays Capital. However, the industrial metals in the index – which is used to reflect overall commodities markets – are up 0.68 per cent.
That reflects, in part, expectations for continued demand from China.
Analysts point to growth from the car and railway sectors as well as the rollout of a 4G telecoms network across the country.
China Mobile, the world’s largest cellular company, will have built the world’s biggest 4G network, with 500,000 base stations and 50m subscribers, by the end of the year.
While the days of double-digit growth are over, the greater size of the economy means lower growth still translates into strong absolute demand. Julian Kettle from consultancy Wood Mackenzie calls it “slower not lower”.
Five per cent growth in copper demand today is equivalent to 13 per cent during the boom years of 2002-2012 in terms of the additional tonnes, according to JPMorgan.
George Cheveley, a fund manager at Investec Asset Management, says Chinese buyers of commodities have run down stocks this year because of tight credit at home. Nevertheless overall demand remains strong.
“It’s not a whole-scale collapse in end-use demand,” he says. “What we have seen this year is iron ore prices collapse and oil come down due largely to worries over supply, whereas nickel, aluminium and zinc prices are up because demand is good and supply has not met that.”
For example, galvanised steel, which contains zinc, is benefiting from increased use by Chinese carmakers because it does not rust. Car sales in China rose 7 per cent year on year to 17m units from January to September, driven by sales of the more zinc-intensive sports utility vehicles and so-called multipurpose vehicles, according to Société Générale.
Underlying zinc demand will rise during 2015 in all the major economies, the bank forecasts.
Another industrial metal that is set to benefit is aluminium, which is increasingly used as a lighter replacement for copper as well as a substitute for steel in some vehicles.
Lead is also expected to get a boost from China’s attempts to lift consumption. While sales of electric bicycles have slowed, the lead-acid batteries they use are also used in hybrid cars. China’s lead-acid battery output is expected to grow about 6.6 per cent in 2015, according to consultancy Shanghai Metals Market.
Tin has the advantage of being a commodity that has little connection to China’s slowing residential property market. “Tin should actually be a beneficiary of any rebalancing of the Chinese economy towards more consumption-driven growth, given that its primary use is in consumer electronics,” said Capital Economics in a report this month.
Still, growth in demand from industries brings with it the unpredictable risk of substitution of one metal for another. For example, increased use of aluminium by the car sector could lead to less demand for zinc, which is used to galvanise steel.
“There are different curves of consumption as development happens,” says Mr Cheveley. “There are classic cycles looking from American and European data, but there are wrinkles around substitutions of materials.”
Industries also become more efficient in using raw materials. For example, smaller electronic devices are using ever less tin in solder, which is used in circuit boards.
While the commodities supercyle is over, the market is unduly pessimistic on commodities, according to Capital Economics. Slower growth in emerging economies has been priced into the market already, and the lower oil price should also help a recovery in the global economy, boosting demand for various metals.
SocGen forecasts that for base metals the influence of cheaper oil is “trivial” and demand and prices should pick up on lower oil prices during the next couple of years.
“Instead of investors buying commodities,” says Caroline Bain, an analyst at Capital Economics, “we are going to see more differentiation between commodities – and which ones are in short supply.”