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The Greatest Decline in Industrial Metals Prices not Even Seen during the 2008 Financial Crisis: How to Picture the Future?
Jun 27, 2022 14:42CST
Source:财联社
As the first half of 2022 draws to a close, if we were to pick the general asset class with the most dramatic movement in the first and second quarters, the answer would probably be the industrial metals.

SHANGHAI, Jun 27 - As the first half of 2022 draws to a close, if we were to pick the general asset class with the most dramatic movement in the first and second quarters, the answer would probably be the industrial metals.

While many people may still remember the chaos of " radical nickel" that spiked in March this year as a result of the short squeeze, today, in stark contrast to the start of the Russian-Ukrainian crisis when industrial metal prices soared, a series of "base metals", from copper to tin, have fallen across the board - the Blommberg Industrial Metals Spot Index has fallen 26% so far this quarter, on track for the biggest quarterly decline since the 2008 financial crisis.

In details, the plunge in some industrial metals prices is even more alarming: LME copper futures prices hit a 16-month low at $8,122.50/mt last Friday and have fallen 11% so far in June, potentially one of the biggest single-month decline in the past 30 years.

The tin price is currently at $26,055/mt, even more than halved from its all-time peak of US$51,000/mt in March.

So, why have industrial metals fallen so sharply recently? And are there more disturbing signals behind this plunge?

The wide application of industrial metals, represented by copper, in fields like household appliances to electric cars, has often made it an indicator of economic activity, and copper has even earned the reputation "Dr. Copper" in economics textbooks. So it is clear that when analysing the recent decline in industrial metals, one should look beyond the supply and demand of the commodity itself.

For a metal like copper, its extensive application from heavy industrial machinery to advanced electronics means that the market is closely linked to economic dynamics, and the retreat in copper prices signals that recession fears are beginning to grip the market.

Earlier this year, copper was traded at around $9,800/mt and then rose further to over $10,400/mt in early March on fears that the Russian-Ukrainian conflict would affect the supply. Today, however, these supply concerns have not ended up being fulfilled much in the industrial metals sector and have instead been replaced by concerns about the health of the global economy.

Federal Reserve Chairman Jerome Powell admitted in testimony before the Senate Committee of Banking last Wednesday that the planned interest rate hikes this year could plunge the world's largest economy into recession. In Europe, data released last Thursday also added to signs of a slowdown, with a survey of business activity showing that Germany, Europe's largest economy, was rapidly losing momentum at the end of the second quarter.

The Fed's move to raise interest rates could have a more immediate impact on discretionary consumer spending, ultimately ending the boom in demand for metals in areas such as real estate, auto manufacturing and durable goods.

How to look into the future?

In terms of positions, trading in the industrial metals sector is certainly being overshadowed by pessimism at the moment. Evidence of investor sentiment turning bearish is most evident in the Chinese market.

Open interest of SHFE copper rose sharply during the sharp fall in copper prices. This suggests that investors are adding new short positions rather than selling off long positions. In contrast, data from the LME suggests that the recent plunge was more due to investors abandoning their bets on higher prices, with bearish positions largely flat for most time of the month.

In fact, the current sharp fall in metals prices has even started to spill over into the mining sector, with some mining stocks falling sharply so far this month - Rio Tinto and Anglo American shares have both recorded more than double-digit falls.

Of course, it should be noted that, in the short term, some of the oversold industrial metals are not completely without rebound opportunities, at least the current supply tightness of some metal varieties still exists.

After LME zinc inventory fell to a record low last week, some industry insiders are fearing that a new supply crisis could be brewing for the metal.

In addition, BMO Capital Markets analyst Colin Hamilton expects aluminium prices to gain support from production cuts as well, as a further reduction in primary aluminium production is likely in the coming months, which should start to provide some support for the prices. Citing soaring electricity prices, large US producer Century Aluminum announced last Wednesday that it will close a 200,000-mt-a-year aluminium smelter in Kentucky over the next nine to 12 months.

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