Base metals market has been under pressure for several weeks now – indeed, during the just ended second quarter - following a combination of sharp hike in interest rates and strengthening US dollar on the one hand and improved supply prospects on the other.

If anything, continued high energy prices have actually prevented a steep fall as metals such as aluminium are highly energy intensive. Energy costs constitute a sizeable part of overall production cost.

Demand concerns

But now, demand concerns are coming to the fore. While slowdown in major industrial economies is a reality, the fear of recession has started to haunt the industrial sector. Without doubt, there is no consensus as yet whether recession will materialise, but market participants are beginning to take that looming risk on board.

This follows a significant monetary tightening by central bankers, especially the US Federal Reserve, to fight inflation.

Two of the world’s largest economies are set for a slowdown in growth. The US economy may grow by only 2 percent this year while China will register a multi-decade low growth of 4 percent. This does not bode well for industrial metals demand.

Worse, there is now growing expectation that the US may face recessionary conditions by the first quarter of 2023. In China, the property market is yet to get back its famed mojo. The positive correlation between economic growth and industrial metals demand is, of course, well recognised.

In the near-term, there will be a tug-of-war between high energy costs and low inventory on the one hand and weak demand growth and investor risk aversion, on the other. Apprehensive market participants have now begun to tread with utmost caution.

Metals market to undergo correction

In the second half of this year, the global base metals market is sure to undergo correction. While prices are poised to fall from current levels it would be unwise to expect a price collapse so long as energy prices remain high and shipping disruptions don’t ease.

According to International Copper Study Group, the metal was oversupplied in the first half of this year. Supply of refined copper has been rising and has exceeded demand. That makes the outlook bleak, exacerbated by demand concerns and waning risk appetite.     

In case of nickel, the International Nickel Study Group says global supply grew twice as sharply as demand. Yet the market showed a moderate supply deficit of 8,000 tonnes, far below last year’s 64,000 tonnes.   

From a state of surplus last year, the zinc market is tightening this year, according to International Lead and Zinc Study Group. The market is under-supplied this year to the extent of 13,000 tonnes and LME stocks are low.

As for lead, the global market supply is seen exceeding demand by about 20,000 tonnes, unchanged from last year.

Amidst all this, there could yet be a wild card. Some experts are betting on a rebound in China’s growth by the last quarter of this year. Chinese policymakers are desperate to reverse the slowdown with appropriate stimulus. Should it happen, the market participants may have to rethink their trading strategy.

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

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