Metal Prices
01/03/2017 16:05 AST
Steel prices have soared in recent months. The cost of base metals used to manufacture steel has also risen. Metal prices at
City Index are affected by a number of factors, but to the uninitiated they offer a unique insight into what’s happening in the global economy.
Raw metals are used to build infrastructure. Prices are affected by supply and demand, so when demand is high and supplies are low, prices rise. Right now, demand for base metals is very high, particularly in China. Whereas many major economies have failed to invest in their increasingly ailing infrastructure in recent years,
the Chinese are taking advantage of low interest rates to invest in roads, rail, and other key infrastructure.
China Increases Spending on Infrastructure
China spends 8.6% of its GDP on economic infrastructure whereas the US and Europe only spend 2.6% of their GDP. The massive Chinese investment in infrastructure, combined with increasing urbanisation, is fuelling demand for copper, steel and other metals, which is reflected in the global price of raw materials. The Chinese Auto industry is also fuelling demand for steel, with vehicle sales in China increasing by 27% last year.
Mine Closures
Prices of industrial metals rose sharply at the beginning of February after the closure of several large mines in the Philippines. These mines are responsible for around 8% of the world’s nickel supply, so the markets reacted immediately to the news. The mines closure comes as a result of a crackdown by President Duterte’s Environment Secretary, Gina Lopez. The Philippines is a major nickel ore producer and much of this ore is exported to China, where it is used to make pig iron.
This pattern of
mine closures and disruption is reflected in other parts of the world, most notably Chile, Indonesia and Australia. In Chile, the news that BHP Hilton would be halting copper production in Escondido sent futures contracts on copper soaring. Output at the Grasberg copper mine in Indonesia has also been affected by political meddling and a strike.
The Australian Mining Industry
The rising price of base metals is good news for the Australian economy, which in recent times has been badly affected by global price drops. There have been dire warnings that the previously buoyant Australian economy, which relies heavily on mining exports, was heading into a recession. Mining giants, Rio Tinto and BHP have been forced to streamline their operations to save money. Not surprisingly, shares in both have taken a tumble.
Analysts believed
steel prices would bottom out in 2015, but in the event prices continued to fall into 2016. However, prices are now on the rise, fuelled by a belief that President Trump plans to invest in US infrastructure, manufacturing and the home-grown steel industry. Many economists believe that the US is set for a major construction boom. Steel is an essential material in construction and infrastructure, so rising demand will inevitably push prices up. If analysts are correct in their steel forecast predictions, prices are set to rise through 2017 and into 2018, Looking ahead, China has stated it will decrease steel production by 2020. Given that China is the largest producer of cheap steel, this will inevitably lead to higher steep prices. And if there are further mine closures in the Philippines, Indonesia and Australia, the price of base metals will continue to rise in response to a shortfall in supply.
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