Base metal prices have experienced a decline following a strong rally in the second quarter of 2024. Copper and aluminum have particularly retraced most of their year-to-date gains due to concerns over weak demand and economic uncertainties.
However, BofA Securities suggests that the downside risk to base metal prices may be limited going forward. The brokerage firm anticipates that factors such as potential Federal Reserve rate cuts, a post-summer rebound in demand, and the resolution of trade disputes could provide support to metal prices heading into 2025.
The current slowdown in manufacturing activity globally is a significant issue affecting base metal prices. Weak sentiment among manufacturers has led to a decrease in industrial inventories, adding to the downward pressure on prices.
Despite these challenges, BofA highlights that the fundamentals for metals remain strong. Physical markets are tight, as indicated by high copper premiums in the U.S. and Europe, and ongoing supply issues for copper and aluminum.
Manufacturing Activity
Recent Purchasing Manager Surveys have shown a decline in manufacturing activity in key regions such as the U.S., Europe, and China. This downturn reflects weaker demand and reduced production capacity in these markets.
Inventories and Premia
Despite some inventory build-up in China, inventories remain at the lower end of historical ranges. Rising copper premiums in China suggest a potential return of buyers to the market, indicating resilience in physical markets that could limit further price declines.
Role of Federal Reserve Policy
The Federal Reserve’s monetary policy plays a crucial role in influencing base metal prices. The current tight monetary conditions are pressuring manufacturers, but anticipated rate cuts by the Fed could ease some of these pressures. Lower rates are expected to benefit sectors like construction, which are significant consumers of metals.
Trade Disputes and Geopolitical Risks
Ongoing trade disputes, especially between the U.S. and China, pose a continued risk to metal markets. The outcome of these tensions and the implementation of tariffs and trade barriers will have a significant impact on metal prices.
If trade tensions do not escalate further, BofA Securities believes that downside risks to base metal prices could be contained.
Outlook for Base Metal Prices
Given the current economic landscape, BofA Securities maintains a positive outlook on base metal prices heading into 2025. Key factors supporting this view include the potential rebound in demand post-summer and support from green technologies.
Overall, while challenges exist in the base metal market, there are also opportunities for growth and stability in the coming years. Investors and stakeholders in the metal industry should stay informed and prepared for potential market shifts.
