2017 PREVIEW: Higher US interest rates won't affect metal markets just yet

Modestly higher interest rates in the USA are not expected to have much of an impact on metal markets, according to industry sources.

And while higher rates could cause issues if they are raised too quickly or too high, this is not an immediate threat, they added.

The Federal Open Market Committee (FOMC) on Wednesday December 14 raised interest rates to a range of 0.5-0.75% from 0.25-0.5%, which was widely anticipated and was largely priced in by commodities and equities.  

The metals complex won’t really feel the effects until rates reach at least 2%, Edward Meir, an analyst at New York-based INTL FCStone, said. 

“[We have] a long way to go," he said. "We’ve gone up [0.5 percentage points] in nine years. I may be dead by the time we reach 2%."

Base metals prices do not seem to have been too fazed by the interest rate decision and, in the weeks leading up to it, didn’t seem to have been affected, Metal Bulletin’s head of research Will Adams said.

“The base metals prices do not seem to have been too focused on the US interest rate decisions. The market has been following its own agenda in recent months. In recent weeks, prices have tended to consolidate and given the gains since late October that is not a surprise,” Adams said in a December 15 report.

"The prices of some industrial metals trended higher after the FOMC meeting, perhaps taking heart from the fact that Fed tightening reflects a stronger US economy," Capital Economics said in a December 16 report.

But Dane Davis, a commodities research analyst at London-based Barclays Investment Bank, said that there is some risk and that a stronger dollar could be a headwind. 

"In the short term, particularly for copper, higher rates will have a negative effect on prices via the stronger US dollar,” Davis said.

The metals' fundamentals are likely to reassert themselves as time goes on and become the dominant factor in prices, he added.

Unless the Federal Reserve lifts rates too quickly, Davis doesn’t think higher rates will have much of an impact on demand for metals.

“If they came too fast and too strongly, that could cause a contraction in the economy and would affect metal consumption in that way. But it’s a low risk,” Davis said. 

But once rates reach 2-3%, Meir said, the entire economy and not just metals will feel the pinch. 

“Then it could be serious. Housing will slow down, consumer borrowing will slow down and the dollar will get stronger. As the economy slows, it’ll impact metals demand,” he said. 

Higher rates could also cause some struggling companies to default because of an inability to handle more expensive money, according to Central Wire’s president and chief executive, Paul From. 

Along with the rising cost of labour and of metals, higher interest rates will simply be another burden that ailing firms will have to bear, he said.

“There are lots of companies now that are just hanging on and, if they face increased costs for anything, it’s going to have an effect,” From said. 

But From doesn’t think it’s necessarily a bad thing if vulnerable firms are taken out of the equation.

“Firms that are just hanging on hurts everyone. The weakest are always performing to the lowest levels. We might need to have some bankruptcies on the metal distribution side,” he said.

But an increase of just 0.25 percentage points will have little impact for now, From added.

“Firms will be able to manage. It’s how much further down the road and how much further interest rates have to go before it has a big effect,” he said.

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