Base metal prices are in freefall – will growth follow?

The price of copper has fallen to its lowest level since November 2020, with aluminium, nickel and many other base metal prices in freefall, too.

“Copper is flashing a recession warning,” says Myra Saefong in Barron’s. Prices have slumped to their lowest level since November 2020. They slumped by 22% in the second quarter, the metal’s worst quarterly performance since 2011. Considered an “economic bellwether” because of its role in everything from electronics to construction, copper’s tumble suggests a “sour outlook” for the world economy.

It’s not just copper, says Albert Edwards in a Société Générale note. Other “industrial commodity prices are in virtual freefall”, with aluminium and nickel down 19.6% and 28.5% respectively since their May peaks. “This is not so much a canary in the coal mine as… the recessionary gorilla charging towards us out of the mist.”

Metals markets have been rescued in the past by Chinese stimulus, but don’t count on it this time, says Bloomberg News. While Beijing is supporting local government spending on infrastructure, the help is not on the scale of the 2008 or 2020 stimulus. The debt-ridden property sector – a key source of demand for metals – remains fragile, while new infrastructure projects in “cloud computing, 5G networks and data centres are less materials-intensive than the... bridges and high-speed railways” that characterised previous stimulus cycles.

Optimists see metals’ slide as an early victory over inflation, but the win might not last. The selloff may reflect financial speculators reining in their bets, rather than a rebalancing of the underlying physical market. JPMorgan Chase reports that “in the week to 1 July about $16bn flowed out of commodity futures markets, bringing the total for the year so far to a record $145bn”. But in the physical market, “commodity stocks remain 19% below historical average at a time of tight production”.

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