AEGIS Factor Matrices: Most important variables affecting metals prices

Base metal prices have rallied in 2022. We have identified several potentially bullish items (and a few bearish items) related to growing demand and rising supply-chain costs.

Metals Factors

Global Supply/Demand (Bullish, Equally Surprise/Priced In)

High electricity costs have made aluminum production unprofitable for several European smelters.  By our estimates, there have been production cut announcements by six European aluminum smelters due to the high electricity costs. These announcements represent approximately 13.7% of European primary smelter capacity.  Production cuts such as these are contributing to surging metal prices, specifically zinc and aluminum. 

The Russia-Ukraine situation could also affect the global supply-demand balance.  Russia is key producer of many metals, including aluminum, nickel, copper, platinum and others.  Several western countries, including the US, are considering sanctions if Russia invades Ukraine.  Sanctions, if implemented, could affect the supply-demand balance of many metals.

Federal Reserve Policies (Bearish, Priced In). The Federal Reserve has hinted that their bond-buying program will end in 2022.  This is likely bullish for the USD, which would usually be bearish for metals prices.  Likewise, interest hikes would likely be bullish for the USD. 

USD (Bearish, Surprise). The USD usually becomes a safe-haven asset during times of economic uncertainty.  Metals prices normally are negatively correlated to the USD. Thus, a flight to the USD could be bearish to metals.  The US dollar index has traded higher in recent weeks, and a further rally could keep a cap on metals prices. 

Supply Chain Logistics (Bullish, Priced In). Supply-chain issues are creeping back into the marketplace. For instance, the US Commerce Secretary recently stated that the semiconductor shortage is a “crisis.”  Likewise, metals shipments may slow.  Any further disruptions may exacerbate current historically high prices.

Inflation (Bearish, Surprise). Recent economic data from China and the US suggest that inflation continues.  For instance, US inflation is at the highest level since the early 1980s.  However, a pullback in commodity prices could cause a drop in those inflationary measures. Likewise, inflation could slow or stop if consumers cannot bear the brunt of further prices increases. 

Raw Materials/Energy Costs (Bullish, Priced In). After falling considerably in early January, CME natural gas prices have started to move higher.  Likewise, European metals producers are still grappling with high electricity prices. 

Labor Market Obstacles (Bullish, Surprise). The emergence of omicron could possibly change how employers deal with COVID.  Reports suggest that omicron could be more transmissible than other COVID variants, thus could impact greater numbers of people. Reports also indicate that approximately 95% of new Covid cases in the U.S. are of the omicron variant. 

Economic Slowdown (Bearish, Surprise). US demand has been strong; however, concerns over the economic recovery both here and abroad could slow demand.  The Chinese economy continues to show signs of weakness, and the real-estate crisis remains in the headlines. Any potential drop in housing demand or pricing could adversely affect domestic copper, aluminum, steel, and iron ore prices in the Chinese market.