The significant drawdown of copper stocks from LME warehouses that has occurred in the past few weeks is a clear signpost to one of the most significant likely dynamics in the commodities markets next year.

Copper had a disappointing 2019 on the whole, ending the year roughly where it started, at around US$2.80 per pound. It’s true that in the early part of the year the metal did take a run at US$3.00. However, for most of the second half the price was well below US$2.80, a level that was only regained in mid-December.

Two factors lie behind the recent recovery, and the likelihood that further gains might be on the horizon. The first, as the recent drawdown of stocks highlights, is that there’s less of the metal around. The second is that the outlook for global trade looks to be improving, with a truce on the cards in the ongoing trade war between the USA and China.

It was negativity about the effects of that trade war that held copper back in  2019, so if a substantive deal can be struck then sentiment is likely to improve significantly. In the background is the recent ratification by Congress of the USMCA trade, and the decisive outcome of the UK general election, both of which remove significant uncertainty from the calculations of traders and investors.

Longer-term, of course, demand for copper is likely to be sustained by the increasing numbers of electric vehicles that will hit the roads. Substantially more copper is consumed by each electric vehicle than is consumed by similar types of cars with internal combustion engines.

And the automotive sector is key to the fortunes of another commodity that will be worth keeping a close eye on during 2020, palladium. Palladium had a stellar run in 2019, hitting new record highs as supply was curtailed by troubles in the South African platinum mining industry, the world’s major source.

Meanwhile, with emissions regulations continuing to tighten around the world, demand for palladium for use in catalytic convertors has soared. And although there has been a slight drop-off in the price in recent weeks, the price is still 50% higher than where it was a year ago. It’ll take a fundamental shift in market dynamics to wipe out those gains, and don’t expect any such event to take place soon, as 2019 rolls round into 2020. Sure, there could be some substitution of palladium for platinum, and sure, if the platinum price improves output might rise producing a corresponding increase in supply.

But the dynamic in the car industry is also clear: more cars are being sold around the world, especially in emerging markets like China. And these will all need palladium to go into their cats.

In the end, electric vehicles will wipe out much of this market, but don’t bank on it happening on a large scale for some years yet.

It’s that realisation that has led to a waning of the immense enthusiasm for lithium that swept the market a few years ago. Debate continues to rage inside the mining and commodities spaces as to the likely long-term balance between supply and demand, given that lithium is an abundant mineral. But a similar pull-back in sentiment has also effected the cobalt price, another star performer that well and truly fell from grace in 2019. Don’t expect an immediate recovery there either.