“Since what I have referred to as the ‘invasion peak’ in early March – shortly after Russia rolled [its armed forces] into Ukraine – we have seen metals… and other commodity prices, come under substantial downward pressure,” Hobbs told delegates on Friday, September 23.
“[And] three macro issues dominate the agenda: high inflation and rising interest rates, led by the US [Federal Reserve]; surging energy [costs], especially in Europe; and Covid-19 lockdowns in an already slowing Chinese economy,” he said.
“These three factors have been bearing down on the price of copper and, indeed, other metals over the past seven months or so,” he added.
A peak in prices across the global metal exchanges was seen when Russia invaded Ukraine in late February, with the three-month London Metal Exchange copper price reaching $10,580 per tonne.
The red metal has since come under broad-based pressure, with the price at $7,341 per tonne at the close of trading on September 26, representing a 31% decrease in value.
Looking forward, Hobbs told delegates that “we should expect central banks including the US Fed to remain very hawkish, hinting at further pressure for the market.”
He said the US Fed’s current policy was likely to add further strength to the dollar, thereby affecting all global commodities that are priced in dollars, including copper.
The US Dollar Index was 114.15 on September 27 but had been as low as 105.09 in August.
“Ordinarily, we tend to see an inverse relationship between the US dollar and copper prices… Lots of copper mining happens in non-US-dollar jurisdictions – meaning that input costs can decrease relative to the sale price of the copper as the dollar strengthens,” Hobbs said.
With regard to energy prices, he said that “many people fear… a recession [and] potentially a deep one” due to a “squeeze on industrial margins, a drop in output, [and a] squeeze in consumer spending.”
Hobbs said that governments were “shaping up to provide support to consumers in industry.” Plans included borrowing against a significant proportion of gross domestic product (GDP). This, Hobbs said, was similar to the stimulus packages that were seen globally at the height of the Covid-19 pandemic, which eventually gave way to economic boom times.
Hobbs warned, however, that market participants ought to give thought to the possibility that the surge in energy prices was already factored-in to the copper price. And, by extension, the downturn may not become “as bad as the markets currently fear.”
But he was not trying to “argue that the fiscal stimulus fully offsets the effect of the increase of energy prices” but rather that maybe the markets do not fully appreciate the significance of the government aid.
He pointed out that the continuing lockdowns appeared to be having a real effect on China’s economy and that, for as long as they continue, worries about the Chinese economy would persist.
As long as China’s government is locking down, people will worry that China’s economy will remain weak – and that is [yet another] headwind.
