AEGIS Factor Matrices: Most important variables affecting metals prices

Base metals prices are mostly bearish as we start the second half of 2023. We have identified several potentially bearish items (and a few bullish items) related to slowing demand and lower energy costs.

Metals Factors

Global Supply/Demand (Bearish, Surprise). Due to subpar Chinese aluminum demand, Goldman Sachs has lowered its global aluminum supply deficit estimate for 2023 to 634,000 mt, down from their forecast of 997,000 mt. One bright spot for 2023 has been China’s growing solar sector, and Goldman Sachs expects that trend to continue into 2024. Globally, aluminum demand from green sectors will reach 5.5 million mt this year, up 40% year-over-over. According to Goldman’s estimates, approximately 60% of global aluminum demand growth over the coming years will come from green industries. (Source: Bloomberg)

Continuing with China, at 153,287 mt, Chinese imports of primary aluminum in August reached a new high for the year. This uptick came while global aluminum prices reached the lowest levels for 2023. Most of these imports could be going directly into domestic consumption, as Chinese primary aluminum inventories have been little changed since July. (Sources: China Customs, LME)

As for Indian aluminum demand, Hindalco Industries, India’s largest aluminum company, is bullish on the aluminum demand prospects. India’s aluminum demand is expected to jump to 9 million mt/year, up from 4.5 million mt currently. This is mainly due to the continued buildouts of numerous infrastructure projects nationwide. India is presently the world's second-largest aluminum producer and the third-largest consumer, Hindalco also stated. These comments were made at the recently held Fastmarkets International Aluminium Conference. (Source: Reuters)

Not all the news related to aluminum is bullish, though. At an annualized rate of 71.2 million mt, global aluminum production hit an all-time high last month, according to estimates from the International Aluminum Institute (IAI). China’s primary smelters lead the way, producing 3.6 million mt in August, or about 60% of the globe’s output. As Andy Home of Reuters stated, “It's now clear that China, the world's largest producer, is experiencing a production surge thanks to improved power supply in previously drought-hit parts of the country's hydro-electric system. What's not clear is whether Chinese demand can absorb the new wave of production.” (Sources: IAI, Reuters)

USD (Equally Bearish/Bullish, Equally Priced In/Surprise). During his speech at the annual Jackson Hole Economic Symposium on Friday, August 25, Federal Reserve Chairman Jerome Powell reiterated the Fed’s 2% inflation target. As for interest rate policy, he stated, “We will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data.”

Despite all the US Federal Reserve’s recent interest rate hikes in 2023, the US Dollar is relatively flat for the year. We, therefore, feel that the USD itself has had little impact on metals prices.

Like the US, most other economies and central banks throughout the world are battling stubbornly high inflation by raising interest rates. This could be why, despite all the US Federal Reserve’s recent interest rate hikes in 2023, the US Dollar is relatively flat for the year. Rising interest rates have likely affected consumer behavior, and therefore contributed to the recent economic slowdown.

Energy Costs (Bearish, Equally Priced In/Surprise). After jumping in early June, CME natural gas prices have trended sideways for nearly three months. As of this writing, the prompt month October ’23 contract now sits near $2.75/MMBtu, up about 30 cents from the lows of early September. The market is in a steep contango, with the November ’24 contract nearly $1.00/MMBtu higher than October. 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, Mostly Surprise). Central banks throughout the world are conducting an interesting battle against inflation. On September 20, the Federal Reserve left interest rates unchanged at 5.25 to 5.50% but will likely hike interest rates by 25 bps before 2024. That said, the US Federal Reserve, along with many other Western central banks, is trying to cool inflation as fast as possible and has raised interest rates significantly over the past couple of years. China, on the other hand, is trying to stoke inflation by lowering interest rates. These policies are obviously at cross purposes. Most Western central banks have an inflation target of 2%, while China’s Central Bank has a target of 3%. Most central banks have suggested that interest rates will remain high through 2024, with little hint that they will start to lower rates before 2025. This is largely because central banks believe they won’t be able to hit their hit inflation targets until late 2024 or possibly 2025.

Tariffs/Sanctions (Bearish, Priced In). Section 232 tariffs on US imports of European steel and aluminum could resume this year unless the US and European Union come to an agreement by the end of October. One of the key issues is how to deal with chronic oversupply from China and other large producers and exporters. Initiated in 2018, these tariffs on EU steel and aluminum were set aside in 2020. These tariffs are at the discretion of the US executive branch and are meant to reduce the flow of metal imports, thereby preventing foreign exporters from dumping cheap aluminum onto the US market. (Source: Bloomberg)

Raw Materials (Bullish, Priced In). India has recently become one of Russia's most important alumina suppliers. At 189,379 mt, India was the second largest supplier of alumina to Russia in the first of 2023. Due to supply constraints from the ongoing Russia-Ukraine conflict, Russia has had to seek out foreign alumina suppliers, mainly China. With Chinese aluminum production rising and other suppliers potentially holding back sales, Russia is seeking alternative alumina suppliers such as India. (Source: Shanghai Metal Market)  

Copper demand remains lackluster for China’s consumer goods and construction industries, however. According to Henan Yuxing Copper Co., which makes components for air conditioners, “Consumption is lagging the previous few years due to the macroeconomic environment…. The whole industry is finding it very difficult.” Approximately 25% of China’s copper demand comes from the construction sector, while about 16% is from consumer goods, according to Citigroup. (Source: Bloomberg)

Speculative Positioning (Bearish, Priced-In): Investment funds, which are purely speculators in the aluminum and copper futures markets, can have an oversized impact on financial prices. For aluminum, these investment funds have flipped into a small long position. As for copper, these investment funds are still net long but have significantly reduced their long position compared to earlier in the summer. Given the state of copper and aluminum demand, we do not think that investment funds will either build a significant long position or greatly influence prices in the immediate future.