2018 has not been kind to commodities. The S&P GSCI Industrial Metals index has slipped by 15% this year. Demand from China has dwindled; the dollar has strengthened; and concern over slowing economic growth has fostered bearishness. However, there have been bright spots, while some metals look poised to shine next year as solid fundamentals overcome the lacklustre overall backdrop.
Palladium is among the best performing commodities this year, having surged by 13% to $1,257 an ounce, surpassing the price of gold for the first time since 2002. Palladium is used in catalytic converters of petrol vehicles, and in the batteries of hybrid cars. Next year, China is rolling out a tougher emissions regime and “demand is forecast to hit a record high”, says Henry Sanderson in the Financial Times. It’s one of the metals to keep an eye on in 2019.
Nickel is due a bounce
So is nickel, “the most baffling” metal, says Alex Newman in the Investors Chronicle. Its price has declined 30% since June, despite five years of strong demand growth outstripping supply. When nickel fell below $11,000 a tonne recently, Macquarie Wealth Management described prices as “unsustainably low”, and in “bargain territory based on a misreading of the strong fundamentals likely for a number of years yet.” Nickel also looks promising owing to its growing use in batteries, including those used in electric vehicles, where demand is expected to surge.
Meanwhile, a lithium boom is “attracting billions of dollars of investment in new mines,” says Jamie Smyth in the Financial Times, as miners worldwide set out to dig up raw materials for batteries.
The global lithium-ion battery market is estimated to grow from $60bn in 2017 to $100bn by 2025, according to the World Economic Forum. Lithium demand is set to triple by 2025 as sales of electric vehicles increase. Sceptics warn, however, that the boom “could turn to bust if electric vehicle sales disappoint.”
Then there’s silver. Prices have declined by 15% this year, and are near a three-year low. “They deserve a closer look,” says Myra P. Saefong on Barron’s. Silver has the dual quality of being both an industrial metal and a precious metal. Over the last few years, industrial demand for silver has been boosted by investment in solar energy and rising semi-conductor manufacturing. Some 65% of demand for silver is for industrial applications, “which look very promising in the coming years,” Johann Wiebe, lead metals analyst on the GFMS team at Refinitiv, told Barron’s.
Silver is also “a good investment” because it is extremely cheap compared to gold. It now takes 85 ounces of silver to buy an ounce of gold – a 23-year high.
India: another central bank governor goes
“To lose one central bank governor may be regarded as a misfortune,” say Tom Miller and Udith Sikand in a Gavekal Research note. But to lose a second, as India has, “looks like carelessness bordering on recklessness.” Central bank governor Urjit Patel has resigned after a dispute with Prime Minister Narendra Modi’s government over the bank’s independence. His predecessor also left before his term was due to end.
Modi faces elections next year and “has repeatedly pressured the central bank to spur lending”, says Bloomberg. The government wanted the Reserve Bank of India (RBI) to relax curbs placed on weaker state-run banks, so they can lend more easily and “keep the economic engines firing”. But the RBI wants to nurse these banks back to health instead.
The government has “trampled the central bank’s independence which, although not legally enshrined, has been built up over… decades”, says Una Galani on Breakingviews. The upshot is that the government “has dented international confidence in the economy,” say Miller and Sikand.
But this really isn’t a good time to do that. The rupee has already fallen by 15% against the dollar so far this year as money has fled emerging markets. India’s long-term prospects may be excellent, but for now irritated investors may reassess their view of political risk in India and “leave Indian assets off the table.”