Metal prices will likely continue under pressure for the remainder of the year as the demand outlook is worsening and the global economy faces problems due to rising interest rates, say analysts tracking commodities.
China’s policies to contain the Covid pandemic with a commitment towards “dynamic zero” are another dampener on metals, which have been declining over the last few weeks.
Prices of key metals such as copper have dropped by nearly 3 per cent from a month ago, while steel has dipped over 3.5 per cent. Tin has declined by some 4 per cent, zinc by 8 per cent and nickel by 8 per cent. Exceptions to the slide have been aluminium, which is up a tad, and lead, which has gained over 8 per cent.
Strengthening dollar
The London Metal Exchange (LME) index, comprising copper, aluminium, zinc, lead, tin and nickel, has declined by 2.5 per cent to 3,583 in the past month. For the year, it has slipped by 20 per cent till now. “Metals prices have continued to decline amid the continued strengthening of the dollar, rapidly worsening demand outlooks due to China’s ongoing commitment to anti-Covid policies, and negative sentiment from the cumulative economic pressures created by rising interest rates led by the Federal Reserve,” said research agency Fitch Solutions Country Risk and Industry Research.
Shanghai Metal Market (SMM) news said high US inflation data in September strengthened the expectation that the US Fed will raise the interest rates by 75 basis points at its November meeting and liquidity will be further tightened.
This is bearish for copper prices. Last week’s drop in crude oil prices due to concerns over the global economy was also bearish for copper prices, it said.
Chinese property sector woes
Fitch Solutions said nickel and copper remain higher than previous lows this year. Iron ore prices have stabilised around $95/tonne, and composite indices of steel are showing declines in the range of 2-3 per cent m-o-m as well. Gold and silver have seen 3.1 per cent and 3.3 per cent m-o-m declines, respectively.
ING Think, the financial and economic analysis wing of Dutch multinational financial services firm ING, said copper has been weighed down by China’s property sector woes and Covid-19 lockdowns while investors have turned away from commodities amid tightening central bank policies.
“The short-term demand outlook remains weak amid recession fears and weakening global manufacturing activity,” it said.
Fitch Solutions said that supply constraints and continued high energy prices are the only drivers offering upward pressure on prices of metals in the current environment due to falling inventories and limited increases in miner CAPEX relative to increases in output.
Monetary tightening pause
“On the other hand, we expect continued downward pressure as the market prices in a much weaker demand outlook in China for Q422 and 2023 and global recession risks, but this will be limited by the feedthrough effect of lower prices on miners and rising potential for a slowdown and pause in monetary tightening in the US and Eurozone,” it said.
ING Think said China’s property support is not buoying the sentiments in the market as the Covid pandemic continues to take a toll on the demand.
Fitch Solutions said steel is the useful indicator for most metals and its demand in China has considerably underperformed expectations this year, with apparent steel demand down 5.6 per cent during January-August.
“The collapse of demand for residential real estate, evidenced by the fact that personal mortgage issuances have been about 25 per cent down year-on-year for each month from June-August, has coincided with considerable disruptions to economic activity… The decline in steel demand points to a broader slowdown in the construction sector that has dragged down demand for a wide variety of metals,” it said.
The research agency, however, said falling inventories will provide a “soft” floor for the decline in prices and supplies could be tight in 2023.