Base metals market subdued on growth fears and trade war

G Chandrashekhar | Updated on October 09, 2019

The world base metals market has been rather quiet in the last few days thanks to a week of holidays in China. On the LME in London, prices of base metals such as copper and aluminium did not move much as Chinese traders did not participate. Copper drifted lower during September and is currently trading close to $5,700 a tonne and aluminium at around $1,750/t.

Other metals too saw range-bound trading with a downward bias. It is, of course, well-recognised that China is the mover and shaker of the global metals market, and all is not well with the Asian major. It is becoming increasingly clear that the risk appetite among investors is yet to kick in strongly. A firmer dollar too is adding to downward pressure on metals.

US-China trade tensions

A critical uncertainty for the market is the trade talk between two of the world’s largest economies – the US and China. The long-drawn and ongoing tariff war between the two counties has surely unnerved the market participants. Despite several signals of reconciliation in the last one year or so, the trade negotiations have made no significant headway.

The next round of discussions is scheduled to be held this week. If anything, stakeholders are now getting increasingly sceptical about any meaningful breakthrough anytime soon. To make matters worse, the US administration recently blacklisted several large Chinese technology firms for alleged violation of human rights. This move, many feel, can actually vitiate the talks, rather than make them accommodating.

Even as the world waits with bated breath for resumption of the US-China talks, the trade war has already taken its toll. Major economies are slowing; and logically, global economic growth too will slow alongside. Not only manufacturing, even the services sector is seen slowing. A recession in Europe is seen nearly imminent, while data suggest the Chinese growth is decelerating too.

Importantly, economists foresee a slowdown in the US in the coming 2-3 quarters despite easy monetary stance of the Federal Reserve. On their part, global institutions such as World Bank and IMF have already warned of the negative fallout of the ongoing trade conflict.

The positive correlation between economic growth and industrial metals consumption is well established. Slowing growth will result in softer physical demand. Weak investor appetite will exacerbate the price action. If anything, speculative investors are building short positions in commodities such as copper despite the metal’s strong fundamentals.

Aluminium market

On the other hand, aluminium market fundamentals suggest the risk of a further fall in price. Ranged trading ($17,000 to $18,000 a tonne) has been the feature in nickel, a key ingredient for stainless steel manufacturers. Although nickel prices fell in September, it is currently trading around $17,500/t on fear of nickel ore supply disruption from Indonesia.

In the event there is little progress on the tariff talks front, base metals are likely to come under further pressure as we move well into the last quarter of the current calendar year.

The author is policy commentator and commodities market specialist. Views are personal

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Published on October 09, 2019
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