There has been a revival in the price of most metals in 2017— zinc was set to increase by almost 40% in 2017, copper and iron ore by approximately 20%, and nickel should end the year up 6%, all on a year-over-year basis. The drivers for this improvement are allied with China's macroeconomic story — robust credit expansion, environmentally minded processing, and residential construction. China's real GDP growth is expected to be 6.8% in 2017, and then — off this higher base — 6.5% in 2018, according to the International Monetary Fund.
At the same time, the key issues for 2018 pertain not only to end-use demand, but also risks to the supply chain. A major threat surrounds China's debt and the country's ability to sustain its real GDP growth rates — this is the process that determines the success of important large infrastructure spending, such as the "One Belt One Road" suite of projects.
Macroeconomic improvement expected next year, despite risks
A key macroeconomic area of support for base metals prices will be through the U.S. dollar as it moves weaker relative to producer currencies. It is likely that we could see a depreciation of the dollar in 2018 against its trade-weighted basket: Industrial metals prices typically demonstrate a negative correlation against the U.S. dollar, and this relationship bodes well for base metals' prices in 2018. As a consensus view, the dollar seems to be weakening, and this will support prices for metals as financial investors look for a store of value outside of the greenback. There are fears that China's 211% credit-to-GDP ratio is unsustainable, and these fears may be justified if it continues to grow in excess of 20% year-over-year. However, similar levels were experienced by both Japan and South Korea, which each used internal systems of credit, guaranteed by central banks, to pump-prime their economies and unlock the potential of their populous and growing middle-classes. Japan saw its credit-to-GDP ratio yawn to 220% in 1993, with South Korea increasing to 193% in 2016. All three fast-growing nations had debt-to-GDP ratios around 120% when their economies were growing at their fastest pace.
For vital insights into how China's domestic credit landscape, environmental regulations, new projects, and technologies may shape the mining industry in 2018, download the full report.