Commodities

How might rate cuts impact copper and aluminium?

Published

4 months ago

September 21, 2024

Investing.com — With the Federal Reserve likely to initiate rate cuts in the upcoming meeting on September 17-18, investors are increasingly focused on the potential impacts of U.S. monetary easing on industrial metals, particularly and .

Analysts at HSBC have constructed two possible scenarios, offering insights into how copper and aluminium prices may behave during different economic outcomes.

In a soft landing scenario, where the U.S. economy avoids a recession and the Federal Reserve makes incremental rate cuts—three 25bps reductions in 2024 and a further 75bps cut in 2025, as per HSBC’s house view—the industrial metals market is expected to follow a similar pattern to 2019.

That year, rate cuts were introduced as part of a mid-cycle adjustment to stave off economic slowdown. The prices of copper and aluminium remained largely range-bound as the market had already priced in the economic deceleration prior to the cuts.

In this scenario, we might see a repetition of the 2019 trend. The demand had weakened before the cuts, and it took roughly two months after the first rate reduction for copper and aluminium prices to form a W-shaped bottom.

Prices then gradually recovered. The subdued market reaction stemmed from the fact that the rate cuts were aimed at maintaining economic momentum rather than responding to a crisis, which limited both the downside and upside potential for these metals.

Similarly, in the coming rate cycle, a quick recovery is feasible, but prices are likely to remain confined within a range unless there is a significant uptick in demand.

If the U.S. economy slides into a recession, the Federal Reserve is expected to respond with more aggressive rate cuts.

“We think metal prices would likely follow the path seen in the dot-com bubble in 2000-2003,” the analysts said.

During that period, both copper and aluminium experienced significant declines—copper by 34% and aluminium by 28%—over an extended downturn as global demand weakened.

Should a recession materialize, industrial metal prices could see a sharp drop, potentially falling by 20% over the next year.

This scenario flags the vulnerability of industrial metals to protracted economic weakness. A recession would deepen the demand shock, extending the period of price decline.

In the past, such downturns have seen metal prices bottom out only after aggressive rate cuts have fully worked their way through the economy and growth begins to stabilize.

Despite the potential challenges, HSBC favors aluminium within its Asia Metals & Mining coverage. The analysts argue that aluminium may exhibit greater resilience compared to copper during this rate cycle due to a combination of supply constraints and robust demand from the ongoing energy transition.

Tight supply across the aluminium value chain, supported by elevated alumina prices, is expected to provide a strong margin buffer.

This resilience could protect aluminium prices from the full brunt of the economic slowdown, particularly as governments might ramp up investments in energy transition projects to stimulate growth.

Moreover, the aluminium market has structural factors supporting its price. Chinese authorities have capped new capacity expansion, and global production growth remains limited.

This supply inelasticity, combined with solid demand drivers such as the energy transition, positions aluminium as a more favorable investment during this period. Key players in the sector like China Hongqiao and Chalco are expected to benefit from resilient margins and output growth. HSBC projects strong earnings growth for these companies in 2024, supported by full capacity utilization and high margins.

When analyzing past rate cut cycles, several parallels emerge that can help guide expectations for the current one.

For instance, during the 1995-1996 soft landing, copper and aluminium prices saw moderate declines, but rebounded as macroeconomic indicators improved.

However, during deeper economic crises, such as the 2000-2003 dot-com bubble and the 2007-2009 global financial crisis, metal prices experienced sharper and more prolonged declines, followed by a slower recovery.

In the more recent 2019-2020 cycle, the Fed’s rate cuts were initially part of a mid-cycle adjustment.

Copper and aluminium prices fell by around 15% and 12%, respectively, but began to recover before the COVID-19 pandemic hit.

The subsequent price recovery was driven by renewed manufacturing activity and a weaker U.S. dollar, which are factors that could play a role again in the current cycle.

While historical rate cut cycles provide valuable insights, HSBC’s analysts caution that the relationship between industrial metal prices and monetary easing only explains part of the picture.

The sentiment-driven impact of rate cuts on metal prices does not fully capture the complexities of supply and demand.

The tightness in copper and aluminium supply chains—aggravated by underinvestment in new copper projects and capacity constraints in aluminium production—provides a strong layer of support for prices.

Meanwhile, energy transition demand, a growing force in both copper and aluminium markets, tends to be less sensitive to macroeconomic cycles. Government spending on energy transition initiatives, such as the U.S. Inflation Reduction Act, is likely to persist, providing a buffer against weaker industrial demand.

Commodities

Gold prices muted as payrolls data fuels rate jitters

Published

7 hours ago

January 13, 2025

Investing.com– Gold prices fell in Asian trade on Monday as traders braced for a slower pace of U.S. interest rate cuts following stronger-than-expected nonfarm payrolls data, which supported the dollar.

Among industrial metals, copper prices took limited support from data showing China’s copper imports hit a 13-month high in December. Sentiment towards China was dimmed by anticipation of more U.S. trade tariffs against the country.

Uncertainty over the economic outlook under incoming President Donald Trump still kept some safe haven demand for gold in play, as did an extended sell-off in broader risk-driven assets, particularly stocks. This limited overall losses in the yellow metal.

fell 0.1% to $2,686.32 an ounce, while expiring in February steadied at $2,714.41 an ounce by 23:49 ET (04:49 GMT).

Gold pressured by increased rate jitters; inflation data awaited

Gold prices were pressured chiefly by the prospect of U.S. rates remaining higher for longer, as Friday’s saw traders further scale back bets on rate cuts this year.

Focus is now on upcoming U.S. inflation data, due on Wednesday, for more cues on the Fed’s rate outlook. The central bank signaled that sticky inflation and strength in the labor market will give it more impetus to keep rates high.

Goldman Sachs analysts said in a recent note that they now expect the Fed to cut rates only twice this year, compared to prior expectations of three cuts. The central bank’s terminal rate is also expected to be higher in this easing cycle.

Higher rates pressure metal markets by increasing the opportunity cost of investing in non-yielding assets. Among other precious metals, fell slightly to $991.45 an ounce, while fell 0.4% to $31.205 an ounce on Monday.

Copper prices flat as markets weigh China outlook

Benchmark on the London Metal Exchange rose 0.3% to $9,111.00 an ounce, while March rose 0.1% to $4.2960 a pound.

The red metal was sitting on strong gains from the prior week, as soft Chinese economic data spurred increased bets that Beijing will unlock even more stimulus to shore up growth.

Trade data on Monday showed that China’s copper imports hit a 13-month high at 559,000 metric tons in December, indicating that demand remained robust in the world’s biggest copper importer.

Copper bulls are betting that Beijing will dole out even more stimulus in the coming months, especially in the face of steep import tariffs under Trump.

Trump- who will take office on January 20- has vowed to impose steep trade tariffs on China from “day one” of his Presidency.

Commodities

Oil jumps on expected hit to China and India’s Russian supplies

Published

7 hours ago

January 13, 2025

By Anna Hirtenstein

LONDON (Reuters) -Oil extended gains for a third session on Monday, with rising above $80 a barrel to its highest in more than four months, driven by wider U.S. sanctions on Russian oil and the expected effects on exports to top buyers India and China.

Brent crude futures rose $1.48, or 1.9%, to $80.96 a barrel by 1236 GMT after hitting the highest level since Aug. 27 at $81.49.

U.S. West Texas Intermediate crude was up $1.67, or 2.2%, at $78.24 a barrel after touching its highest since Aug. 15 at $78.58.

Brent and WTI have climbed more than 6% since Jan. 8, surging on Friday after the U.S. Treasury imposed wider sanctions on Russian oil. The new sanctions included producers Gazprom (MCX:) Neft and Surgutneftegaz, as well as 183 vessels that have shipped Russian oil, targeting revenue Moscow has used to fund its war with Ukraine.

Russian oil exports will be hurt severely by the new sanctions, pushing China and India to source more crude from the Middle East, Africa and the Americas, which will boost prices and shipping costs, traders and analysts said.

“There are genuine fears in the market about supply disruption. The worst case scenario for Russian oil is looking like it could be the realistic scenario,” said PVM analyst Tamas Varga. “But it’s unclear what will happen when Donald Trump takes office next Monday.”

The sanctions include a wind-down period until March 12, so there may not be major disruptions yet, Varga added.

Goldman Sachs estimated that vessels targeted by the new sanctions transported 1.7 million barrels per day (bpd) of oil in 2024, or 25% of Russia’s exports. The bank is increasingly expecting its projection for a Brent range of $70-85 to skew to the upside, its analysts wrote in a note.

Expectations of tighter supplies have also pushed Brent and WTI monthly spreads to their widest backwardation since the third quarter of 2024. Backwardation is a market structure in which prompt prices are higher than those for future months, indicating tight supply.

RBC Capital Markets analysts said the doubling of tankers sanctioned for moving Russian barrels could be a major logistical problem affecting crude flows.

“No one is going to touch those vessels on the sanctions list or take new positions,” said Igho Sanomi, founder of oil and gas trading company Taleveras Petroleum.

“Russian supply is going to be disrupted, but we don’t see this having a significant impact because OPEC has spare capacity to fill that supply gap.”

The OPEC+ cartel comprising the Organization of the Petroleum Exporting Countries and a group of Russia-led producers, is holding back 5.86 million barrels per day, about 5.7% of global demand.

Many of the tankers named in the latest sanctions have been used to ship oil to India and China after previous Western sanctions and a price cap imposed by the Group of Seven countries in 2022 shifted trade in Russian oil from Europe to Asia. Some of the ships have also moved oil from Iran, which is also under sanctions.

“The last round of OFAC (U.S. Office of Foreign Assets Control) sanctions targeting Russian oil companies and a very large number of tankers will be consequential in particular for India,” said Harry Tchilinguirian, head of research at Onyx Capital Group.

JPMorgan analysts said Russia had some room to manoeuvre despite the new sanctions, but it would ultimately need to acquire non-sanctioned tankers or offer crude at or below $60 a barrel to use Western insurance as stipulated by the West’s price cap.

Commodities

Precious metals, energy sectors seen gaining at least 10% in 2025 – Wells Fargo

Published

1 day ago

January 12, 2025

Investing.com – Macroeconomic challenges facing commodities in the first three quarters of 2024 have reversed and become tailwinds entering the new year, according to analysts at Wells Fargo (NYSE:).

Elevated interest rates and broader economic uncertainties weighed on commodity prices over the January-to-September period last year, although that trend largely turned around in the fourth quarter, the analysts led by Mason Mendez said in a note to clients published on Monday.

Commodities in general delivered a modest performance in 2024, they said, with the Bloomberg Commodity Total (EPA:) Return Index clocking a 4.5% year-to-date increase as of Dec. 26.

“While supply conditions remained supportive of higher prices, commodity demand was held back by global economic headwinds,” the analysts wrote.

That tepid demand is seen improving in 2025, becoming a possible spark that ignites an uptick in commodity prices, they added. However, they flagged that the supply side “should not be forgotten.”

“After two years of lackluster commodity prices, many commodity producers have slowed production growth,” the analysts said. “This could become a particularly acute point in 2025 in the event that demand recovers at a stronger pace than most expect.”

They noted that new commodity output often lags demand “by months, and sometimes years.”

Among individual sectors, the analysts said they are most keen on precious metals, such as , and energy, with both expected to gain at least 10% in 2025. This would exceed the return the analysts expect from the mid-point of their 250-270 target range range for the broader Bloomberg Commodity Total Return Index.

Gold, in particular, experienced a turbulent end to 2024 due in part to caution around more Federal Reserve interest rate cuts, which contributed to an uptick in nominal and real bond yields that dented the appeal of non-yielding bullion.

Still, the yellow metal jumped by around 27% annually to close out the year at $2,625 per troy ounce, and the prospect of more Fed rate reductions — albeit at a possibly slower pace — could continue to boost its appeal, the Wells Fargo analysts said.

They set a target range for gold prices at $2,700-$2,800 per troy ounce this year.

Energy, meanwhile, is tipped to benefit from greater demand as global economic conditions improve, the analysts forecast. is tipped to be between $85-$95 a barrel, while crude is seen at $90-$100 per barrel. Oil prices dropped by around 3% in 2024, weighed down partly by a sluggish post-pandemic recovery in global demand.