Why industrial metals are losing their shine
Most industrial metals lost heavily from their mid-March highs when Russia triggered military operations in Ukraine. Weak demand amid slow global economic growth and a two-decade-high US dollar adversely hit the prices of industrial commodities.
In the domestic future’s platform, Aluminium is the top loser, shedding prices by more than 38 per cent. Copper and Zinc declined by 28 and 24 per cent, while steel prices contracted by 21 per cent so far. A similar trend was seen in its corresponding international platforms as well.
Due to surging inflation, central banks across the world were prompted to hike interest rates. A high rate of interest would control the purchasing power of customers, which in turn would lead to low demand.
The US Central bank is hiking its interest rates more aggressively. The US Federal Reserve increased rates four times this year and hinted at more rate hikes in the coming meeting, weighing down the global growth outlook.
Like the Fed, central banks globally are engaged in the battle against surging inflation. The European Central bank, Reserve
, and Bank of Canada have also hiked rates recently.
The aggressive measures taken by central banks to tackle the surging inflation caused huge swings in currencies too.
Recent rate hikes take the US dollar to fresh 20-year highs. The dollar index, which measures the value of the US currency against a basket of other foreign currencies, gained more than 14 per cent so far this year.
The US dollar has an important role in determining global commodity prices as it is the benchmark pricing mechanism for most commodities. Commodity prices are inversely correlated to the dollar. When the dollar appreciates, the price of commodities measured in other currencies rises. This causes an increase in raw materials that eventually leads to a decline in demand.
Aggressive rate hikes of the US Federal Reserve also dampened the business mood across the world. A contraction in business activities hit the sentiments of industrial metals.
Business activities in Europe suffered their biggest contraction in 18 months because of higher prices and falling demand. As per reports, Europe is facing fears of a recession due to extreme inflation.
The ongoing economic catastrophe in Europe is particularly due to the high energy prices. Fuel prices in Europe are floating at record highs as an aftermath of Russia cutting oil and gas supplies to the region.
Economic activities are fragile in many Asian countries as well. The zero Covid policy of China and cost pressure continued to hurt businesses, causing a slump in factory activity.
China is the top consumer of industrial metals. But economic slowdown deepened in the country in recent months. Economic data like retail sales, industrial output, and investment are all missing economists’ estimates. This was primarily due to Covid disruptions and an ongoing slump in the property sector.
The US economy has also shrunk from April through June, for a second straight quarter. This is stirring concerns that the world’s largest economy is heading towards a recession.
At the same time, the ongoing liquidation in prices is unlikely to extend for a longer period. A turnaround in China’s economy and a correction in the US dollar are likely to attract more buyers to the metal complex. Chances of supply constraints due to limited capacity additions and high electricity prices may offer support prices later.
(Hareesh V is Head of Commodities at
)