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As we look to 2022, global economic development is still in the first real resilience test, and the emergence of the mutated coronavirus in southern Africa makes this recovery more challenging.
Nonetheless, our economists believe that unless there is a more serious deterioration of the COVID-19 pandemic, aggressive fiscal policy will continue to support a recovering economy, the fundamentals will be solid in 2022, and the global potential GDP will remain above 4.1%.
In the policy shift, taking into account the roughly neutral macro policy and the relatively stable total social financing (TSF) growth rate of 10%, China's economy is expected to grow by only 4.7% month-on-month in 2022. While housing policy will continue to be fine-tuned to avoid crises and systemic risks, we do not expect a major reversal in recent housing austerity.
Car production appears to have taken a turn for the better in the fourth quarter of 2021. Although it is still in its infancy, the faster-than-expected speed of bottleneck resolution could spur greater purchase momentum throughout the automotive supply chain in 2022.
As the U.S. is gradually withdrawing from the current quantitative easing policy, attention has turned entirely to when the Fed will raise interest rates. Our economists now expect the economy to turn better in September 2022, followed by further rate hikes in December, followed by another hike every quarter, at least until the real policy rate returns to zero.
In the case of base metals, China's economic growth stabilization and policy adjustments will further eliminate downside risks, manufacturing resistance begins to clear, we expect base metals prices to be supported in the first quarter of 2022, in a complex market environment, we believe that aluminum and nickel have the greatest upside potential in the next quarter. But these views of ours will be affected by the uncertainty of the mutation of the new crown virus.
Looking ahead to 2022, as supply and demand begin to balance, easing continued supply tensions, and extremely accommodative monetary policy begins to normalize more significantly, we expect economic fundamentals to come under pressure later in 2022.
Since we are not optimistic about China's macroeconomic outlook, the biggest upside risk to our pessimistic view in 2022 is that China's policies will be more supportive of economic growth next year.
Our view of gold and silver has hardly changed, and the real yield on dollar assets is expected to increase significantly by 2022, which makes us bearish on both metals.
There will be a more positive shift in light vehicle sentiment, which could trigger a price rally in platinum group metals. But the medium-term fundamentals of platinum and palladium look very different: we give a more positive forecast for platinum, and palladium may face significant resistance.
1 Macro Outlook: This time it's different
Looking ahead to 2022, the global economic recovery is in the midst of its first true resilience test. Persistent bottlenecks coupled with higher energy prices have exacerbated supply pressures, dampened production and weakened demand. In addition to this, a serious variant of the coronavirus emerging in southern Africa could exacerbate the current COVID-19 outbreak in Europe and pose a risk to the entire Northern Hemisphere this winter. While the front line of covid-19 protests is not optimistic (new variant viruses are drug-resistant/viruses causing more severe symptoms), our economists still predict that the global economy will pass this resilience test and we will continue to see global GDP accelerate to 5.1% ar in the current quarter after growth in the third quarter of 2021 (3%ar). The first round of data released in October supports our view as retail and IP rise sharply in the U.S. and China, pointing to what contributed to the early manufacturing downturn: disruptions in the global automotive and Chinese energy sectors are easing, and the trend is likely to accelerate in the coming months.
Looking ahead to next year, we economists believe that global potential GDP growth will remain above 4.1% in 2022, and proactive fiscal policy will continue to support the current economic recovery. This is mainly due to the fact that the global growth drivers from the normalization of the services sector remain strong, and the manufacturing sector is stronger as supply constraints ease. On the consumption side, even at risk due to rising prices, we also see an increase in household savings largely offsetting a decline in purchasing power (Exhibit 2). Overall, in our projections, these factors will enable advanced economies to close the output gap during the recession by the end of 2022, much faster than the expansion in the roughly eight years since the global financial crisis. Although in the case of metals, with broad support from the broad global growth environment in 2022, we believe that the three specific macro drivers that will be critical for next year are 1) policy support and growth in China (especially in the real estate sector), 2) supply chain and logistics constraints (most importantly vehicle production) and 3) normalization of central bank policy, especially the Fed's shift from taper to interest rate hikes.
2 China is undergoing a policy shift
Over the past few months, our economists have been discussing a shift in Chinese policy. In short, while growth remains important, they argue that other policy objectives, including financial stability, decarbonisation, and stabilization of housing prices, are beginning to take center stage (China Policy Shift, Aziz et al., October 8, 2021). This means that despite a marked slowdown in growth last quarter (GDP contracted by 3.3 percent ar), macroeconomic policy support is likely to remain limited, as Chinese authorities currently appear to be more tolerant of lower economic growth. If this continues into 2022, it will mean a shift in China over the past decade from its previous counter-cyclical, old-fashioned economically-driven easing. In this regard, this month's Politburo meeting showed little indication that the Chinese authorities were overly concerned about the current economic slowdown.
To be clear, this does not mean that we expect China's economic growth to continue to decline sharply next year, nor does it mean that fiscal and monetary support will be completely missing. In fact, after China's GDP remained at the 10% growth level in October, our economists expect total social financing (TSF) growth to pick up by the end of the year, in part because economic growth will return to a quarterly 4.0% quarter-on-quarter (2.9% year-on-year) growth rate this quarter. For us, this means that policy support will be modest and more rigorously targeted, as the focus is on limiting the credit market pressures that these policies may generate. We believe that major changes in industrial and housing policies are unlikely, and that downside risks to growth and the risk of large-scale systemic contagion will be contained. Still, the growth outlook for 2022 remains rather bleak, at just 4.7% year-on-year, with macro policy being broadly neutral, with TSF (Gross Social Financing) growing relatively stable at 10% (Chart 3) (EMOS: China, Zhu et al., November 23, 2021).
In addition, many important traditional base metals (construction and real estate, infrastructure) end-user sectors may still be constrained by policy mandates such as the real estate sector or the chain reactions induced by these tasks (reduced steel and cement production due to decarbonisation, higher raw material prices, and restrictions on construction and infrastructure activities).
More specifically, there will be no major reversal of the recent austerity in China's real estate policy, and housing is not expected to be used as a counter-cyclical policy tool. As a result, the real estate market is expected to weaken and the real estate FAI (Fixed Asset Investment) will maintain negative growth in the first half of 2022. (China: House prices fell another 0.3 percent as sales and investment weakness intensified, November 15, 2021). This means that the real estate market is likely to remain weak for some time at the beginning of 2022, our real estate team predicts that new projects started throughout the year will fall by 10% year-on-year, land sales in October are still 56% year-on-year as the land market still shows no signs of a major recovery, and the weak trend in construction is likely to continue at least until the second quarter, or even the third quarter of 2021, and the new private housing starts are expected to fall by 2% year-on-year in 2022. （China Property: NBS data update: Weak as expected， Chan et al.， 14 Nov 2021）.
All in all, policy will continue to be fine-tuned to avoid price plunges and systemic risks. Housing is the most important asset in Household Wealth in China, accounting for nearly 60% of total household assets (30% in the US), and the real estate sector accounts for 15% of GDP (including construction and real estate services) (Chart 4) (J.P. Morgan Perspectives: Red Flags on Asia Housing，Chang et al.， 18 Nov 2021）。 Chinese Bank has reportedly introduced a series of measures, including easing mortgage approvals, excluding M&A loans from the "three red lines" net debt ratio, and issuing bank loans to developers, the industry's credit easing signals have been issued, although this policy fine-tuning direction is expected to continue, but the overall tight regulatory policy reversal is unlikely, mainly because he is one of the pillars of China's economic transformation.
In terms of base metals, we forecast that China's total demand for copper and aluminum will grow by about 1% month-on-month in 2022, with demand for use in the construction sector roughly flat (25% copper and 30% aluminum). Despite a significant decline in new starts since mid-year, it is still possible to prioritize guaranteed completions, which has led our China real estate team to forecast private residential completions in 2022 to be in line with 2021. Still, this will mean a sharp deceleration in growth, with private housing completions growing by more than 16 percent in October even in the short term, while the team forecasts growth of nearly 5 percent for the full year of 2021.
In terms of downside risks, if housing is not properly adjusted in the short term, then the decline in base metals due to the decline in construction demand will be far beyond our forecast, according to our estimates, a decline of about 4-5% month-on-month in building demand may be enough for us to reduce our forecast for overall demand in China next year, considering that the demand for white goods such as air conditioners has a positive correlation with real estate completion, so the forecast for flat growth in other sectors is already very optimistic. There are signs that Chinese authorities are fine-tuning housing policies in response to a slowdown. Economic malaise could be avoided in 2022. In further discussion below, a more aggressive than expected China policy could be one of the biggest upside risks to our view of base metals in 2022.
3 How does the automotive industry trend shift?
In the coming year, the huge impact of the shortage of semiconductor chips on the production of light vehicles will continue to be a major factor influencing metal prices. But there have been early signs of bottleneck relief over the past few weeks, and it could soon shift from a factor driving the metal downside to one that pushes its price upside. The problem actually boils down to the speed and magnitude of the rebound in automobile production in the coming year. IHS's latest November forecasts ended a series of substantial global declines and showed global light vehicle production grew by nearly 14% sequentially in the fourth quarter. If this becomes a reality, it will mean that the third quarter of 21 marks the lowest point in the production of semiconductor drivers in 2021. However, the consultancy still believes that global production will not reach the 2019 average again until the fourth quarter of 22 years (Chart 5). In our view, the risk of such a rebound could be advanced, which could mean stronger replenishment incentives across the automotive supply chain during 2022, helping to support demand and sentiment for industrial and platinum group metals.
In terms of the semiconductor supply chain, the Semiconductor Industry Association reported this month that shipments of semiconductor products in the third quarter of 2021 exceeded any other quarter in history. In addition, strong exports of electronics from Taiwan, the waning impact of the COVID-19 pandemic on Malaysia and Southeast Asia, and the two full quarters since the Naka plant in Japan resumed production after the March fires, all point to a loose mid-term automotive supply chain market. (Figures 6 and 7). Industry consultancy International Data Corporation (IDC) expects semiconductor shortages to ease in the fourth quarter of 2021 as capacity increases accelerate, with the market expected to normalize in the middle of next year, followed by a series of large-scale capacity expansions announced later in 2022. While some automakers remain concerned about the cancellation of last-minute orders this quarter, others are increasingly confident about the market rally, including U.S. Steel CEO David Burritt, who noted on the company's earnings call in late October that numerous auto consumers were "heralding the trough of chip shortages that are leaving." （IHS Forecast Update: 4Q Outlook Encouragingly Maintained， Possibly Signaling Stabilizing Supply Chain （Although Some Suppliers Skeptical）， Brinkman et al.， 12 Nov2021）.
In conclusion, we believe that bottlenecks in the automotive supply chain may show signs of further easing in the coming months. This has the potential to boost expectations of a rebound in production of young cars in 2022 and mean that the IHS's forecast of 11% growth in 2022 is at upside risk. As we explore in detail below in terms of metals sectors, this could most directly lead to short-term bullish sentiment for platinum group metals and may also most directly benefit from aluminum and zinc demand next year.
4 Countdown to fed rate hikes
As the U.S. has scaled back its bond purchases, the focus has shifted entirely to the timing of the Fed's interest rate hikes. The current rate of shrinkage means that asset purchases will be completed by the middle of next year. However, the FOMC stressed that it is prepared to adjust the pace of purchases if the economic outlook changes. This remains a key risk. FoMC minutes from early November show that even before the unexpectedly strong growth in CPI in October, voters have supported an accelerated process of scaling back debt purchases if inflation continues to heat up. Still, our economists see signs that supply bottlenecks in the commodity sector seem to be easing and expect inflation to slow next year, easing pressure on the Fed. On the other hand, going into next year, the supply of available labor in the United States will only become less and less. Against the backdrop of early retirement, sluggish immigration flows, and expectations that labor demand will remain strong, our economists believe the unemployment rate is falling faster than current FOMC forecasts, putting more upward pressure on wage growth and long-term non-temporary inflation
This means that they now see the FOMC's remaining conditions — full employment — materialized by the middle of next year, and now expect the Fed to raise rates in September 2022, then raise rates further in December, and then raise rates quarterly thereafter until real interest rates reach zero.
With current Fed Chairman Jerome Powell about to be re-elected for a second four-year term, the Biden administration decided to continue continuing the continuity of the Fed's leadership. However, the Biden administration still has three vacancies to be filled. While these policymakers are likely to be selected because they will prioritize "broadness and inclusiveness" of full employment and incorporate dovish tendencies into next year's policy, we don't think it will fundamentally change our forecasts. As our economists have pointed out, "Even dovishes know that falling too far behind the curve can be detrimental to achieving full employment on a stable basis." Currently, the market expects the Fed to raise interest rates in June 2022 and raise rates across the board twice before the end of next year at about 75%, although market prices have slowed further and eventually interest rates have been lower. Our interest rate strategists believe that this cycle of rate hikes could be different from the last one as the U.S. economy can cope with more tightening policies. They forecast a significant rise in 10-year nominal yields next year, with a target of 2% by the second quarter of 2022 and 2.25% by 2022. With the long-term break-even point expected to ease later in 2022, the U.S. 10-year real yield is expected to rise sharply in 2022, to -65 basis points by the second quarter of 2022 and to -30 basis points by 2022 (Chart 8). On the foreign exchange side, the approaching Fed rate hike marks a transition to a later stage in the middle of the cycle, when the dollar enjoys greater direct appreciation. Against this backdrop, our forex strategists predict that the dollar will continue to be supported through 2022, with risks leaning towards the Fed to more aggressively expand the dollar's strength against high-yield currencies. （Global FX Strategy 2022: Lift vs. Drift， Meggyesi et al.， 23 Nov 2021）.
5 The energy transition is moving forward
The momentum of the energy transition has increased significantly last year, and while the near-term demand momentum surrounding the rebound in China's construction industry and overall light vehicle production is likely to dominate in the first half of 22, growing green demand will remain a key long-term catalyst for metals next year. Although in 2021, as sales of electric vehicles are still relatively small, total PV sales have been impacted, Europe, China, and even the United States, which has high fuel consumption and poor endurance, have taken a big step this year in terms of vehicle electrification share (see Figure 9). While chip shortages are likely to ease in 2022, we don't expect it to disrupt broader trends in EV penetration as new models roll out and emissions regulations tighten. From a share of around 5% this year, we are now seeing global sales of battery electric vehicles (BEVs) account for more than 15% of global light vehicle sales in 2025 and approach 30% by 2030 (see Figure 10).
In the appendix that follows, we detail the latest forecasts for metal demand for the energy transition (electric vehicles and chargers, renewable energy, grid upgrades, etc.). In summary, copper and nickel still get the most attention among base metals (followed by aluminum), in part due to the significantly better performance of pure electric vehicles compared to internal combustion engine vehicles and the longer time for new capacity to be launched. Green demand growth already accounts for more than 40% of overall copper demand growth next year, and total copper demand during the energy transition is expected to grow from 1.8 million tons this year to more than 3 million tons in 2025. However, we remain cautious that a prolonged structural slowdown in China's traditional copper demand over the next decade will limit the room for growth in global copper intensity.
In the short term, nickel's performance on the demand side is more pronounced. The vast majority of nickel demand growth in the coming years will come from batteries, although its share of overall demand is relatively low. This makes the growth of The supply of Class 1 nickel and the increase in capacity from NPI to copper critical in the coming years. In addition, the biggest risk to the long-term demand for nickel for electric vehicles is the shift from high-nickel cathodic chemicals such as NMC (lithium nickel manganese cobalt oxide) and NCA (lithium nickel cobalt aluminum oxide), which are currently dominant, to nickel-free LFP (lithium iron phosphate) batteries from China that are faster than expected.
In contrast, in the years that followed, palladium was also seriously threatened by the increasing electrification of light vehicles. Increasing substitution of platinum-palladium automotive catalysts and increased vehicle electrification pose a growing threat to palladium demand. In our current forecasts, palladium demand peaks in 2024 and declines in 2025.
6 Base Metals Price Outlook
In this complex, we see that aluminum and nickel have great upside potential in the next quarter. On the aluminum side, we believe its prices have been over-adjusted, with fundamental tensions recovering as Chinese production continues to be constrained. We believe this will push up aluminum prices again to $3,000/mt in the coming months, followed by more sustained growth in Chinese supply in the second half of 2012. On the nickel side, we expect nickel prices to continue to rise, reaching an average of $23,000 per tonne in the first quarter of 2022, as inventory levels on the London Metal Exchange (LME) are already low and the Chinese market across the production chain is tighter. While the broader market fundamentals are less convincing from the current continued push-up of zinc prices, zinc prices may still lay a huge risk premium for a disruption in Europe throughout the winter. Finally, in our view, copper has more limited upside in the short term, as we expect micro fundamentals to become more accommodative in the coming months.
Looking ahead to next year, we expect fundamentals to come under pressure later this year as supply and demand begin to balance, easing the ongoing supply tightness and normalizing extremely accommodative monetary policy. In addition, as inflation is expected to remain slower during 2022, inflation hedging inflows may begin to ease, removing key support that could have contributed to price performance this year (Chart 11).
Given our relatively bleak forecast for China's macro outlook, the biggest upside risk to this more pessimistic view in 2022 is that China's policy support next year will be stronger than we expect. If China's tolerance for low growth is lower than we expect, policy support increases, the market may see a weakening of real-time supply and demand fundamentals, and expectations of strong future demand for China may push up prices amid continued growth brought about by the energy transition
7 Precious Metals Price Outlook
Our forecast of a sharp rise in US real yields at the end of 2022 has fueled our bearish outlook on gold and silver prices for the coming year. The 10-year nominal yield is expected to rise to 2.25% by the end of 2022, and the U.S. 10-year real yield is expected to reach -30 basis points by the end of next year, nearly 80 basis points above current levels. From an average of $1765 per ounce in Q1 2022, the price of gold will decline steadily next year, with an average price of $1520 per ounce in Q4 (the average price for the full year of 2022 is $1631). Silver prices are expected to fall from around $23/oz in the first quarter of 2022 to $18/oz at the end of 2022, with an average price of about $20.5/oz for the full year of 2022. Uncertainty about emerging coronavirus variants in Africa could spur more safe-haven buying in the short term, which remains an upside risk. In the medium term, the biggest risk to this forecast is that the Fed will be more robust next year, which will make gold and silver relatively more supportive than we predicted.
After a sharp decline, we believe that a faster-than-expected rebound in 2022 young car production could trigger a sharp shift in market sentiment and push palladium prices back up to $2,200/oz in the short term. Nonetheless, we think the price recovery of palladium is likely to be relatively short-lived, as in the strong supply and demand outlook, substitution losses and the impact of electric vehicles make the medium-term fundamentals still look very weak. As a result, we are still seeing a decline in palladium prices in 2022 from an average of $2200/oz in Q1 to an average of $1800/ang in Q4.
On the other hand, we have raised our platinum price forecasts for 2022 and 2023 by more than 10% and are now seeing prices rise steadily over the next year to reach the fourth-quarter average of $1,200 per ounce. In stock, platinum still has a huge surplus for a year, but as mineral supply declines in 2023, while replacement ancillary demand growth remains strong, with the faster adoption of fuel cell electric vehicles (FCEVs) among heavy-duty and fleet-type vehicles, we are seeing a sudden shift to shortages in 2023-2025, which remains an upside risk for prices and could spark more investor interest.
In terms of risks, we do not expect possible measures taken in South Africa against emerging COVID-19 variants to significantly hamper mining operations, but this is still a low probability upward scenario. More immediately, late last week, PGM sold off sharply in broader risk-offs, and another serious wave of global coronavirus mutation could plunge supply chains into longer-than-expected disruption, threatening our more optimistic outlook for light vehicles.
This article originated from the Heqiao Think Tank