Metals Market Analysis: Economic Uncertainties Impact Iron Ore, Copper, and Aluminium Prices
Aa
Share
Any steel output cut would add to bearish risks for the iron ore market, while the seaborne supply side is showing signs of strength with major producers reporting robust production numbers and exports from Australia and Brazil remaining elevated.
We believe the outlook for iron ore remains bearish in the short term amid sluggish demand from China’s steel-intensive property sector. The pledges from Beijing to support the economy are underwhelming for now and support for the real estate sector is not likely to translate into large-scale property development that would revitalise steel demand in the country and lift iron ore prices.
We believe prices will remain volatile as the market continues to be responsive to any policy change from Beijing.
Copper warehouse stocks remain historically low
Like iron ore, copper prices are driven by economic policies from China and other major economies. LME copper prices had a strong start to the year as China's reopening boosted the outlook for demand. Copper was one the biggest winners following China’s reopening amid expectations that China’s support for the property market would kickstart demand for industrial metals. But prices quickly turned as that optimism faded, remaining mostly rangebound since February. Copper prices ended the first half of the year flat from where they started the year.
Since May, prices have mostly been on an upward trend. Copper was lifted in the first half of July by the US dollar dropping to a one-year low on the release of a positive June inflation number and prices remained elevated throughout the month trading mostly above $8,400/t. However, in recent weeks, copper has been struggling for direction amid an uncertain path of US rate hikes and China’s lacklustre economic recovery. LME prices dropped to a one-month low following worse-than-expected July trade data from China.
However, the supply side remains supportive of copper prices – total warehouse stocks at the LME, COMEX and SHFE remain historically low. Refined copper exchange inventories are now at the equivalent of just two-and-a-half days of global consumption. This sets up the market for squeezes and spikes in prices if we see demand improving sooner than expected.
For example, weekly copper stockpiles reported by the SHFE dropped by 15% last week and remain below the seasonal average. These critically low levels of Chinese inventories could be partially explained by weaker supply out of Chile, the biggest producing nation. The country saw its July copper exports come in at the lowest level since January, suggesting that Chilean operations continue to suffer project delays and mine setbacks. Chilean state copper producer Codelco has reduced production guidance to between 1.31 Mt and 1.35 Mt for 2023, from a previous 1.35 Mt and 1.45 Mt. Codelco's production drop has been systematic for the last three years.
We remain cautious about the short term for copper, with sluggish demand from China pointing to lower prices. We believe in the near term, copper prices are likely to continue to be dictated by the pace of China’s economic recovery as well as the Fed’s interest rate hiking path. However, we believe low levels of global visible stocks are likely to prevent prices from significant decreases until copper consumption improves again.
Aluminium supply side woes ease as Yunnan restarts
July was the first month this year that saw LME aluminium prices closing the month higher than where they started. Prices closed at a similar level to their peak within the month.
However, the fundamental picture for aluminium has not changed. Instead, the July price increase came amid a softer US dollar and hopes of more stimulus from China. The start of August saw LME prices moving lower again.
On the supply side, we expect output to grow fast in China. The power supply in Yunnan improved significantly from May with the arrival of the rainy season. By late July, around 1.1Mt of capacity restarted in Yunnan, and we believe the resumption of Yunnan capacity remains the key headwind for aluminium in the near term. However, if the upcoming dry season has insufficient rain, output could be cut again with a lack of hydropower leading to rising Chinese imports.
China's primary aluminium production (1000 metric tonnes)
In Europe, however, we don’t expect major restarts before 2025, while demand for aluminium remains weak. Europe suspended around 2% of the global total capacity by the end of 2022 as power prices surged. And although power costs have now eased, only one smelter has restarted so far this year. Meanwhile, Norsk Hydro recently said it does not plan to restart the aluminium output it curtailed during the European energy crisis while market conditions remain weak.
Chinese aluminium exports drop on weak global demand
On the demand side, Chinese exports of aluminium products did not improve in July, signalling weak demand for aluminium products globally. China exported 489,700 tonnes of unwrought aluminium and aluminium products, a drop of 24.9% year-on-year and down 0.6% month-on-month. The cumulative export from January to July 2023 is now at 3.29 Mt, which represents a decrease of 20.7% from the same period last year.
In the near term, we believe aluminium prices will remain volatile as the market’s focus will stay on the bigger macro-economic picture with flagging global growth weighing on aluminium demand.
We expect prices to start recovering in the fourth quarter on the improving global economy, which will lead to stronger aluminium demand growth. However, the recovery will be slow as demand will only start improving substantially before next year.
ING Forecasts
