Macro Minutes: What Is Driving Metals Volatility

Title screen appears, “What is Driving Metal’s Volatility?”

Presented by: Zacher Lewis, Fisher Investments Securities Research Analyst, on behalf of Fisher Investments Europe.

A man appears on the screen wearing a blue suit, sitting in an office. He begins to speak.

A banner identifies him as Zacher Lewis Fisher Investment Securities Research Analyst.

On behalf of Fisher Investments and its affiliates.

Zacher Lewis: Hi, my name is Zachery Lewis and I'm a securities analyst here at the Research department at Fisher Investments. And today I'll be talking about recent metals volatility and Fisher Investments views on metals moving forward.

A white screen appears with a chart titled: "Metals Price rose following vaccine Announcement but fell recently “

The chart is showing metal prices progress through the years 2020 and 2021.

Zacher Lewis: We've all likely heard about high metal prices this year, but to understand about how we got to where we are today, we should look at how metal prices have acted since the start of the global pandemic.

 As uncertainty surrounding the global pandemic grew in early 2020, investors slashed their expectation for metals demand due to institutional lockdowns, causing metal prices to fall sharply. However, fears over lower demand quickly reversed after a small initial decline, and demand remained healthy throughout the pandemic, led by a growing China. Despite this, investors sentiment was still relatively sceptical to the sector, as doubts over metals demand lingered. These doubts were largely expunged when Pfizer's vaccine efficacy data was released in early November, leading to a massive rally in metals prices as investors priced in the reopening out of COVID related lock downs.

Zacher Lewis: This rally was accelerated by tight supply as COVID related shutdowns and restrictions limited metals production. Furthermore, a strong economic recovery stoked expectations for higher economic growth and inflation, leading to further optimism in metals markets. Prices reached a peak, however, in early May as economic releases begun to show slowing economic growth and inflation.

Zacher Lewis: Prices fell further as the COVID-19 Delta variant spread throughout the world. Debt concerns from one of the largest Chinese property developers ever, Evergrande, has led to further price declines, in recent weeks. Aluminium and US. Steel have largely avoided the pullback seen in other metals due to relatively little exposure to Chinese real estate and reduced Chinese steel and aluminium production.

The screen changes into another 2 charts titled” Sharp Changes in Investor Expectations have Added to Materials Volatility This Year”,

A subtitle would follow “Investors trading metals have influenced prices in addition to underlying fundamental changes”.

Zacher Lewis: Despite the many news stories seemingly impacting metals markets this year, we caution investors from putting too much weight into daily or weekly price movements. This is because large price movements are, in the short term, often not caused by lower production or higher consumption of metals, but actually by traders outside of the value chain buying and selling large quantities of metals.

Zacher Lewis: The chart on top is a good example of this. The green bar shows the net position held by those outside of the value chain or the speculative position. Large movements in copper prices often line up, with traders buying and selling the metal, showing the influence these investors have on prices. These investors often make these trades to express a certain forward-looking view on the market. This was seen in April and May as investors bought up metals and mining firms, as inflation expectations grew, then sold them off as those expectations fell. Overall, Sticking to a long-term view of metals, helps investors understand what matters for the market and what's just noise.

The white screen, shifts into 2 new charts titled “Industry specific Drivers Mixed” with the following subtitle “Global Metal supply growth remains muted but China's total Social financing growth has moderated”

Zacher Lewis: So, what does our outlook for metals look like?

As with any commodity, metals prices are a function of supply and demand. Overall, metal supply growth has been relatively limited over the past six years. Roughly the typical period for adding new supply to the market, making metal supply generally limited an overall positive for metals. However, Chinese demand, which represents over 50%of global metal demand, is less constructive. In addition to the commonly discussed fears surrounding Chinese real estate developers, credit growth measured by Chinese total social financing, has been relatively weak. Since this financing often pays for new construction infrastructure, a moderation of credit growth is by and large negative for metals demand. So, with tight supply but moderating demand, industry fundamentals look relatively mixed.

The screen changes into a table titled” Metals and Mining Typically Do Best During Periods of accelerating Economic Growth Inflation” the subtitle is “Current Economic outlook Favors higher growth firms over metals despite tight supply.

Zacher Lewis: One last analysis is to look at what environments metals typically perform best in. Overall, metals typically do well in periods where both economic growth and inflation are accelerating. As these increases, demand for metals while modestly boosting metals firms pricing power. However, we expect only modest inflation and moderate economic growth moving forward. Thus, we would expect metals to underperform larger and higher growth companies, which typically do best in low growth and low inflation environments. Overall, tight supply does make metals and mining a relatively attractive counter strategy to a growth led portfolio, as a slight increase in demand likely leads to strong metals performance.

The screen changes to a white screen, with the sentence “Thank you for watching. If you would like to learn more about our views, please reach out to your relationship manager or email FisherInstitutional@fi.com”

Zacher Lewis: Thank you for watching. If you would like to learn more about our views, please reach out to your relationship manager.

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