Copper and aluminium are the two widely used industrial commodities and both were highly volatile throughout this year due to factors pertaining to their fundamentals.
Copper prices in the domestic futures market started this year near Rs 730 a kg but sharply surged to Rs 945 a kg by the end of May due to supply worries. Later, the feeble demand outlook from China adversely affected the metal, correcting it about 18 percent from its all-time highs.
The performance of aluminium was also not different. It started at Rs 210 a kg in January but quickly hit a high of Rs 255 by the end of April. It later dropped down to Rs 207 in July and now recovered to Rs 240 levels.
Slow demand from China , uncertainty over further US rate cuts, feeble global growth outlook amid worsening geopolitical tensions were the reasons behind the fluctuating price performance.
However, China’s recent economic stimulus and US rate cut offered a positive momentum.At the end of the last month, China’s central bank unveiled its biggest economic stimulus since the pandemic .The stimulus was initiated with a view to pull the economy out from the deflationary funk and to achieve the government’s growth target. A slew of disappointing data and worries of a prolonged structural slowdown in China was affecting the sentiment of base metals prices earlier. The recent stimulus is expected to offer more funding and interest rate cuts which are likely to restore confidence in the economy resulting in a surge in demand for industrial commodities.
China is the largest consumer of base metals and consumes around with 50% of global output. But the post Covid economic recovery in the country has been brief and less robust than expected earlier. Enduring crisis in its real estate sector and the trade war with the US resulted in lack of confidence among households and businesses which is denting consumption, affecting the demand.
A surprise 50 bps rate cut by the US Federal Reserve also raised the demand prospect of industrial commodities. Lower rates can stimulate economic growth leading to higher demand for materials which are used in construction, manufacturing and other industries.
Lower bank rates make borrowings cheaper. This can spark more investment and spending in industries that use base metals like construction, manufacturing and infrastructure projects. With cheaper loans, companies expand operations, build new facilities and purchase more raw materials. This heightened activity naturally drives up the demand for raw materials. Increased economic activity from individuals will also feed into higher demand for commodities.
Looking ahead, the broader demand prospects for these commodities continue to grow, especially with the push towards clean energy and sustainable technologies. There are expectations that demand for copper and aluminium will double over the next decade and the world’s mines will struggle to meet the demand that could reflect in prices.
Meanwhile, the short-term outlook remains volatile as there are still beliefs that the recent Chinese stimulus measures are not adequate to uplift the demand. The ongoing geopolitical tensions and a recovery in the US dollar may also limit the imminent demand outlook.
(The author Hareesh V is Head of Commodities, Geojit Financial Services. Views are own)
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