Base metal demand likely to remain strong. Here’s why

Base metals prices in the global markets witnessed a mixed sentiment in the first quarter of 2023. Though copper and aluminium managed to hold moderate gains, other metals like zinc, lead, and nickel lost momentum on an uncertain demand outlook.

The reopening of China’s economy and better-than-anticipated industrial growth in Europe and the US lifted demand for base metals. A correction in the US dollar also helped stimulate the demand.

However, prevailing uncertainty in the global economy due to the Russia-Ukraine war and rate hikes by the US Federal Reserve outweigh the positive effects of the demand and capping prices.

Copper prices in London Metal Exchange gained more than 7.5 percent since January. Aluminium too edged higher by 3 percent during the same period. A similar trend was witnessed in the key Shanghai futures and domestic markets as well. Supply bottlenecks and forecast of increased demand from China assisted gains in these metals.

The outlook for base metals is largely dominated by macro forces like the US dollar, demand from China, energy prices, and global growth forecast. The metal complex had an extremely volatile trading year and ended in the red last year, due to geopolitical headwinds.

These headwinds started softening at the beginning of this year with China’s move to drop its zero-tolerance policy on covid-19.

China is the world’s largest consumer of base metals. The construction industry in the country is the largest consumer of copper, aluminium, and zinc while the manufacturing industry uses significant amounts of nickel and lead.There are expectations that base metals demand from China is likely to remain strong for the rest of the year. Post covid recovery is well on track with increased consumption in the country. Recently, key investment banks raised the growth forecast of the country following an impressive first-quarter GDP growth number.

Hopes of decelerating interest rates by the US central bank helped the US greenback to correct lower from a twenty-year high hit last year. Since most globally traded commodities are priced in the US dollar, a weak greenback makes commodity prices less expensive relative to other currencies. This usually stimulates demand and supports prices.

The aggressive rate hikes of the Fed last year were challenging for all asset classes across the globe. In 2023 the US policymakers are taking a different approach by increasing the rate at a slower and more deliberate pace. This may further ease the US dollar and support raw material prices.

The global energy landscape has changed dramatically since the sanctions on Russian crude and natural gas. Now, the prices have cooled down, aiding upstream and downstream industrial players. Global gas prices have nosedived sharply since the beginning of this year on demand worries. A balanced global oil market also caused a sharp correction in oil prices supporting economies worldwide.

However, the uncertain global economic outlook amid financial sector turmoil, high inflation, ongoing effects of Russia’s invasion of Ukraine, and three years of the pandemic may obstruct the metal complex from major gains.

Looking ahead, the metal complex continues to be choppy with mild positive bias. Initially, traders were apprehensive about the outcome of the US Fed’s policy decisions and China growth story. A forecast of a lower likelihood of a surge in global energy prices may be a positive signal for industries.

At the same time, forecasts of a fragmented global growth outlook and rising worries of a recession may restrict major rallies over the course of the rest of the year.

(The author, Hareesh V is Head of Commodities at Geojit Financial Services)