Markets Bite Metals

Base metals reacted last week to another spate of difficult political and economic news. Global equities were also lower, led by a rout of the 'Faang' technology stocks, and oil is back below US$60/bbl.

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Wall Street remains wobbly after the Thanksgiving break as fears increase over trade and economic growth. The recent sell-off in technology equities has broadened to a retreat in global share prices, with the decline being led by energy stocks and the five 'Faang' stocks; Facebook, Amazon, Apple, Netflix and Google ­— the tech-heavy Nasdaq exchange is heading for its worst quarterly loss for ten years. The weaker economic signals, and doubts that Saudi Arabia will carry through on threats to cut production, also saw crude oil prices fall below US$60/bbl, the lowest level in more than a year.

Markets drew blood after barbed comments were exchanged between the US and China at the Asia Pacific Economic Co-operation summit in Papua New Guinea at the beginning of the week. The tension between the world's two largest economies resulted in APEC failing to issue a joint communiqué for the first time in its 29-year history.

The mood was not helped by a report from Morgan Stanley which concluded that taking advantage of weakness in equity prices had not worked this year. This is the first time 'buying the dip' has not worked since 2002, and is, according to the US bank, usually a signal of a bear market. Morgan Stanley warned that "while 2018 is clearly not a year of recession, the market is speaking loudly that bad news is coming".

As a result of this turmoil, last week was another difficult period for the major metals, with particularly heavy losses for nickel, iron ore and zinc, and only gold made ground. Nickel fell 5.8% in the seven days to end-Friday, closing in London at US$10,750/t, with iron ore (62% Fe) down 4.1% at US$72.1/t and zinc 3.9% lower at US$2,503/t. Copper dipped 0.9% to US$6,159/t and aluminium slipped 0.1% to US$1,934/t. Gold strengthened 1.3% over the week, however, to close at US$1,227/oz.

The weaker zinc price this year has caused financial difficulties for the lead-zinc producer Nyrstar NV. The company's net debt, excluding zinc prepayments and perpetual securities, was €1.14 billion at the end of September. Nyrstar last week signed a US$650 million loan facility with its major shareholder Trafigura Ltd for working capital. There might be better news ahead as S&P Global Market Intelligence's Metals and Mining Research team announced last week that it maintains a positive short-term outlook for zinc prices.

Fears grew last week of a prolonged slowdown in the eurozone as the latest monthly poll of purchasing managers sank to its lowest level in four years. Analysts suggested the data might delay the European Central Bank's plans to stop its emergency support for the European economy.

There is also growing concern over corporate America's debt burden. A sell-off in 'junk' bonds deepened last week and the cost of insuring against defaults rose to its highest level since 2016. Exchange-traded funds that track the high-yield bond market fell heavily last week and are at levels not seen for over two years.

Despite the tumbling markets, investors seem sure that the US Federal Reserve will raise interest rates in December. The outlook in 2019, however, looks less certain. Meanwhile, investor interest remains strong in environmental, social and government assets, and ESG funds under management have risen 60% since 2012, and recently passed the US$1.0 trillion mark.

Chris Hinde

Chief Commentator, Mining Beacon

Previously editorial director of Mining Journal, and more recently head of S&P Global Market Intelligence's metals and mining team, Chris is now Mining Beacon's editor-in-chief and lead commentator. He posts two blogs every week, one on Monday reviewing market conditions over the prior week, and a second on Thursday looking at issues on the global mining scene. There is also a quarterly blog on business opportunities in the sector.