Base metal prices have experienced a decline following a strong rally in the second quarter of 2024. Copper and aluminum have especially seen a significant pullback in their year-to-date gains due to concerns over weak demand and economic uncertainty.
However, BofA Securities suggests that the downside risk for base metal prices may be limited moving forward. The brokerage firm anticipates that factors such as potential Federal Reserve rate cuts, a rebound in demand post-summer, and resolution of trade disputes could support metal prices going into 2025.
The main challenge facing base metal prices currently is the slowdown in manufacturing activity worldwide. This has led to a reduction in industrial inventories, exacerbating the downward pressure on prices.
Despite these challenges, BofA highlights that the fundamentals for metals remain strong. Physical markets are tight, with high copper premiums in the U.S. and Europe, and ongoing supply issues for copper and aluminum.
Manufacturing Activity
Recent Purchasing Manager Surveys have indicated a decline in manufacturing activity in key regions such as the U.S., Europe, and China. This slowdown is attributed to weaker demand and reduced production levels.
Inventories and Premiums
Despite recent inventory build-ups in China, inventories are still within lower ranges. Copper premiums in China have shown signs of improvement, indicating a potential return of buyers to the market. This resilience in physical markets suggests that further price declines may be limited.
Role of Federal Reserve Policy
The Federal Reserve's monetary policy plays a crucial role in influencing base metal prices. Tight monetary conditions have pressured manufacturers, but anticipated Fed rate cuts could ease some of these pressures. Lower rates are expected to benefit sectors such as construction, a significant consumer of metals.
Trade Disputes and Geopolitical Risks
Ongoing trade disputes, especially between the U.S. and China, continue to pose a risk to metal markets. The outcome of these disputes will significantly impact metal prices. However, if tensions do not escalate further, downside risks to base metal prices may be contained.
Outlook for Base Metal Prices
Considering the current economic environment, BofA Securities maintains a positive outlook on base metal prices into 2025. Key factors supporting this view include the potential rebound in demand post-summer and support from green technologies.
Overall, while challenges persist in the base metal market, there are indications that prices may find support in the coming months. Factors such as monetary policy, trade developments, and manufacturing activity will continue to influence the trajectory of base metal prices in the near future.