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Base metals prices gave a muted performance for much of June as the market became more impatient with the China stimulus story. However, we will likely see a gradual stabilization in the second half of the year as China’s economic recovery begins to accelerate.
The LME aluminium price is facing fresh headwinds following reports of an imminent resumption of smelting operations in China’s Yunnan province. Most of the previously curtailed aluminium smelting capacity in Yunnan resumed production on June 20 adding as much as 1.3 million tonnes per year of aluminium smelting capacity amid increased power supply.
Despite a positive view on aluminium prices in the very short-term, we remain wary that the medium term is likely to be more turbulent for aluminum prices. We reiterate that the prevailing downward trend that started in the March 2022 high sell-off will likely remain for now. It will take for a positive break above January 2023 high to change that view.
The imminent resumption of previously-suspended smelting capacity in China’s Yunnan province, now that energy availability has improved, is a fundamental headwind supporting our downtrend opinion. Learn more.
The recent upswing in copper prices, primarily driven by China’s increased economic support stems from short-covering than new buying, hinting at a cautious market sentiment. The LME official copper price appreciated by 2.3% in the week ending June 16, marking a third straight week of gains. That same week, Chinese state planners embarked on a proactive course by unveiling a multitude of tax incentives and proposing additional lending opportunities for small businesses. These measures are designed to address an urgent issue affecting consumers and investors while attempting to increase financial sector liquidity and resolve economic challenges.
Traditional seasonal trends suggest possible price weakness ahead. However, as China’s economic recovery accelerates, we anticipate a strong copper price rebound in the year’s second half. Consequently, any imminent price drops should be considered less as a sign of worry and more as a window of opportunity for increased exposure to the red metal.
LME nickel cash prices were up 4.9% and three-month prices 5.0% in June on a weekly average basis, which made nickel the strongest performer of the base metals suite.
While nickel prices have rebounded well and could still run higher in the short-term, we think it is prudent to consider this a bear market rally. It will likely produce a lower high and the longer-term downtrend. Bear may refocus on the $20,000-per tonne level and the 2022 low before long. We still see higher nickel prices and a rising trajectory in Q4, although we may not have seen the lowest level in 2023 as yet.
Base metal prices remain mixed due to uncertainty about stimulus measures out of China. It seems that the market is giving China the benefit of the doubt after policymakers didn’t do enough to support the economy’s recovery in the first half of the year.
Chinese policymakers are now showing a willingness to provide more support for the economy. With a slew of tax breaks and suggestions for more loans for small businesses, Chinese state planners are in talks to address the problem many consumers and investors already feel.
We expect China’s economic recovery to pick up speed in the second half of the year, which should logically support base metal prices. Learn more.
In a recent CFTC Commitment of Traders Report (COTR) we observed another decrease in the bearish speculative positioning in CME copper, to the smallest net short position since mid-April. This decline compares with the biggest net short position observed since March 2020 at the height of the Covid-19 panic.
The reduction in the net short position was accompanied by a recovery in copper prices due to long position holders adding to their bullish exposure and short position holders reducing their bearish exposure. We see similar developments as short-covering and long position building leads to higher prices – in LME data covering the other base metals.
Investors may be taking a less-bearish stance as the US debt ceiling impasse has been resolved. The US Federal Reserve has paused interest rate rises, the US dollar index has turned lower and Chinese policymakers are being supportive of the country’s property sector and the broader economic recovery.
Further positive changes in macro sentiment could illicit more short covering and/or long position building, which would lift base metal prices higher in the mid-term. Learn more.
To understand the complex market conditions influencing price volatility, download our monthly base metals price forecast, including the latest base metals market outlook.