Amid economic growth, technological shifts boosting a surge in the use of metals and a shortfall in supply, metals have been benefitting from a bull market since mid-2016, according to a study on metals conducted by Coface.
All this, dubbed by the weaker US dollar, has prompted a metal price rally, with aluminium posting a 37% year-to-date increase while cobalt quadrupled, copper and nickel prices grew by +44% and +53% respectively and zinc prices doubled, compared to the beginning of 2016, the study says.
While growth and profitability have returned back on track for most segments, the metals industry remains one of the riskiest in Coface’s sector assessment, with a credit risk level evaluated as “high”. Weaker actors are still pertaining to wholesaling activity and struggling with asymmetrical relationships with big player customers.
“As for Romania, the metal market is rising in 2018, according to data published by the National Institute of Statistics. Turnover generated by the foreign market increased by 17.5 percentage points in April 2018 versus April 2017 and we saw a stagnation in the domestic market.
The evolution of the industrial production prices is increasing, the total index – the domestic and foreign market – in April 2018 it is increasing by 10.5 percentage points compared to April 2017”, Nicoleta Maruntelu, Senior Financial Analyst, Coface Romania, stated.
The main partners in the European Union in 2017 in terms of metal trade for our country were: Germany 23% of total sales to the EU, Italy (14%), and Hungary (9%) according to the provisional data of the National Institute of Statistics for 2017. As for the metal acquisitions, the main partners are: Germany, with 24% of the total value of metals imported from the EU, Italy (22%) and France (8%). The value of metal sales in EU increased by 18% in 2017 compared to 2016, while the value of imports increased by 16% in 2017 compared to 2016.
Coface anticipates that the appetite for investment and business confidence in the metal sector will be negatively impacted by this context of rising protectionism in 2018.
All signals suggest that the world economy has passed its growth peak and, in theory, this is likely to exert downwards pressure on prices as from 2019. In the short term, rising tensions will certainly continue to push up prices. This will benefit major base metals which are boosted by surges in demand for battery and electronic components. In the period from December 2017 to December 2019, aluminium is set to grow by a mere 2%. Copper should follow the same trend, growing by 2.4%, while nickel and zinc are expected to increase by 18% and 14% respectively. This will force end-users, such as battery and car manufacturers, to find other materials in case of scarcity or higher prices.
In contrast, steel prices will probably fall by 19% over the same period, while overcapacity is expected to increase as Chinese steelmakers lack discipline in capping production during periods of weakening prices. This base scenario of price falls in ferrous metals is supported by the overall high levels of company debts. Net debt ratios are especially high in China, where the sector is dominated by large state-owned enterprises, as well as in US (at 15%), where companies are much more exposed to potential corrections in cash flows.