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Industrial metals have experienced widespread weakness in 2023, including nickel’s rout has been grabbing headlines. So far, prices including copper, nickel, zinc and aluminium are all below their levels of a year ago and copper prices continue to disappoint investors in the start of 2024.
Industrial metal prices are inextricably linked to China’s economy, which consumes more than half of the world’s metals, and even more of its iron ore and battery raw materials. And over the past year, the property and stock market crises have exacerbated concerns about China’s economic outlook, adding to the downward pressure on industrial metal prices.
Marcus Garvey, head of commodity strategy at Macquarie in Singapore, noted in a new trading brief that signs of a price recovery are emerging in the industrial metals space. the January purchasing managers’ index showed new orders in the global manufacturing sector rose by 1.2 percentage points to 49.8, which should be a potential turning point in the global industrial cycle, with bullish implications for demand for industrial commodities.
The report said that an important factor leading to pressure on industrial metal prices early in the year is that the Federal Reserve is likely to cut interest rates less than expected this year, boosting the dollar and putting pressure on dollar-denominated commodity prices.
However, Macquarie pointed out that the relationship between commodity prices and global economic growth is far more important than the relationship with exchange rates. And commodity demand in the US “looks to be re-accelerating”. Manufacturing in developed economies is likely to recover, and Europe is likely to enter its next restocking cycle.
Analysts point out that while China has so far refrained from broad-based stimulus measures, investment in infrastructure fixed assets, led by renewable energy, and certain sectors, including automobiles (especially electric vehicles), have shown clear strength. Ultimately, if commodity prices rise in response to a pick-up in global industrial production, this could dampen the impact of commodity inflation on its own, reducing the scope for further central bank easing.
Garvey believes that now is the time to buy the falling industrial metals. At the very least, one should be selective and begin to gradually build positions in those markets where fundamentals are already relatively tight or are likely to tighten quickly. Of all the industrial metals, Garvey is most bullish on copper, believing that it will benefit the most from the green energy transition and the rejuvenation of the US and Chinese economies.
