Base metals prices are mostly bearish as we start 2024. We have identified several potentially bearish items (and a few bullish items) related to raw material issues and speculative interests.
Metals Factors
Global Supply/Demand (Mostly Bearish, Surprise). Primary aluminum smelters in China’s Yunnan province, the country’s top production region, have been slow to bring back previously curtailed production, according to a report from Beijing Capital Futures. Rainfall in April and May is expected to be low, suggesting that hydropower supply could be short, and leading to lower electricity production. This ultimately means the recent ramp-up in aluminum production could be short-lived. (Source: Bloomberg)
USD (Equally Bearish/Bullish, Equally Priced In/Surprise). Despite all the US Federal Reserve’s recent interest rate hikes in 2023, the US Dollar has been relatively rangebound for the better part of a year. Rising interest rates have likely affected consumer behavior and, therefore, contributed to the recent economic slowdown. That said, we feel that other factors have had a greater impact on metals prices, as opposed to the USD.
Energy Costs (Bearish, Equally Priced In/Surprise. CME ULSD (diesel) prices are up slightly this year. The forward curve remains backwardated, meaning that futures prices are lower than nearby. If you are a manufacturer that is also a large consumer of diesel, please reach out to AEGIS on how to hedge your diesel exposure.
CME natural gas prices have trended lower in early March. As of this writing, the prompt month April ’24 contract now sits near $1.65/MMBtu, roughly 30 cents/MMBtu off the recent highs. The market remains in a steep contango, with the January ’25 contract nearly $2/MMBtu higher than April ’24. Despite the contango, this could be a good time for consumers such as aluminum extruders to hedge future natural gas needs. We also note that natural gas prices have been extremely volatile in recent weeks. Please contact AEGIS for specific strategies that fit your operations.
Economic Slowdown/Global Interest Rates (Bearish, Equally Priced In/Surprise). On March 20, the US Federal Reserve left interest rates unchanged at 5.25 to 5.50%. They also stated that interest rates could fall by 0.75% this year, meaning that there could be two to three interest rate cuts. Inflation remains “sticky” and higher than the Fed’s target rate of 2%, though. In a previous meeting, they stated that interest rate cuts likely wouldn’t occur until they were more confident that the inflation rate was nearing 2%.
Most metals priced slumped at the most recent US inflation reading. To cool inflation, the US Federal Reserve could be forced to keep interest rates higher for longer. This, in turn, could be a continued burden on metals prices, especially copper and aluminum, which are highly sensitive to interest rates.
China’s slumping real estate sector remains a burden for metals prices. Earlier this year, Evergrande, once China’s largest real estate developer, filed for bankruptcy due to an insurmountable debt load of $300 billion. Some analysts believe that China’s construction season will be a boon for metals demand, but we remain skeptical, given the amount of overhang in China’s real estate market.
Tariffs/Sanctions (Bullish, Priced In). Recently, the US Commerce Department issued preliminary tariffs on aluminum extrusion imports from Mexico, China, Turkey, and Indonesia. The MWP market reacted little because the final tariff rates won’t be known until late July 2024 due to the US Commerce Department’s ongoing investigation. Also, it is currently unclear when these tariffs will go into effect. (Sources: Mining.com, Wiley Law)
Raw Materials (Bullish, Mostly Priced In). Chinese copper demand is “finely balanced,” according to commodity brokerage Sucden Financial. The brokerage cites rising inventories despite lower production for the perceived market balance. SHFE warehouse inventories have surged from 30,905 mt on December 31 to 285,090 mt as of last Friday. Meanwhile, copper refiners are having issues with sourcing raw materials, which has hurt refined copper production. (Source: Reuters)
Speculative Positioning (Equally Bullish/Bearish, Priced-In) Investment funds, which are generally speculators in metals markets, have switched a modest long position in LME aluminum. This is the first time they have been long aluminum since early January. As of last Friday, these funds are net long approximately 14,900 contracts, having purchased nearly 16,600 net contracts last week. (Source: LME)
Meanwhile, investment funds have started to slow their buying of LME copper while prices hit the highest level in nearly a year. As of last Friday, these investment funds are net long 37,500 contracts, having sold about 500 contracts during the week. Prior to the recent downtick, investment funds had been steady buyers of LME copper in recent weeks, likely due to production issues. After briefly eclipsing $9,000/mt for the first time since April 2023, copper prices have cooled since mid-March. (Source: LME)
Geopolitical Risk (Bullish, Surprise). SSAB, one of Europe’s largest steel producers, has grown hesitant on demand due to the ongoing conflict in the Red Sea. “The geopolitical situation, which is nothing new maybe, still hampers the underlying demand a bit and the problems in the Suez Canal and so on,” CEO Martin Lindqvist stated on Tuesday. This apprehension about demand comes despite cooling inflation in most Western economies and the prospect of decreasing interest rates. (Source: Bloomberg)