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). Chinese primary aluminum production surged in February and will jump again in March, according to estimates by Shanghai Metal Market. Last month, the country’s primary aluminum smelters produced 3.333 million mt, up 7.8% compared to February 2023. For March, SMM predicts that production will jump to 3.55 million mt, up 4.0% compared to last March. This increasing output is mainly due to a smelter in Mongolia ramping up production. Seasonally, demand increases after the Lunar New Year holiday, justifying this uptick in production. (Source: Shanghai Metal Market)
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 January 31, the US Federal Reserve left interest rates unchanged at 5.25 to 5.50%. They also stated that they don’t see any interest rate cuts until they are more confident that the inflation rate is nearing 2%. Federal Reserve Chairman Jerome Powell also stated that is unlikely they will do a rate cut at the next meeting in March.
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). Last week, 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). Copper prices rallied last week on continued hopes that Chinese demand will recover. In an annual government meeting last week, Chinese authorities provided little detail on how they plan to grow industries that are large metals consumers, but some analysts believe that demand will recover in the coming months. In a note late last week, Citigroup stated that Chinese demand “could be quickly revitalized by strong credit prints for February and March and/or meaningful detail of support for metals-intensive sectors like property and infrastructure.” Some supply issues have sprung up recently, further fueling the bullishness. (Source: Bloomberg)
Copper smelters in China are raising alarm bells about the recent substantial drop in treatment charges, which has suppressed profit margins. Treatment charges, which are the fees that miners pay to have their raw copper processed into refined metal, have fallen by nearly 90% in the past six months due to low available feedstock. The lack of copper concentrate and poor profitability have led to substantially lower refined production. Several analysts recently interviewed by Bloomberg believe this situation will last for months. Lower production in China has likely contributed to the significant rise in global copper prices in recent weeks. (Source: Bloomberg)
Speculative Positioning (Equally Bullish/Bearish, Priced-In Prices for zinc, a key raw material for hot-dipped galvanized steel production, have jumped in recent weeks while investment funds cover their short position. At the end of February, investment funds, which are generally speculators in metals markets, had a net short position of approximately 19,000 contracts. As of last Friday, however, these funds had a net short position of only 6,900 contracts. Given that investment funds can have an oversized impact on metals markets, this is likely why LME zinc prices have rallied nearly 6% this month. (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)