Demand for base metals is likely to remain high!

Base metal prices in global markets were mixed in the first quarter of 2023, although copper and aluminum maintained moderate gains, other metals such as cynk, lead i nickel, lost some momentum due to the uncertain demand outlook.

The reopening of the Chinese economy and better-than-expected industrial growth in Europe and the US boosted demand for industrial metals. The correction in the US dollar also helped spur demand. However, the uncertainties in the global economy related to the Russo-Ukrainian war and interest rate hikes by the US Federal Reserve (Fed) outweigh the positive effects of demand and price restraint.

Copper prices on the London Metal Exchange have increased by more than 7,5% since January. Aluminium it also gained 3 percent over the same period. A similar trend was also observed in key futures contracts in Shanghai. Supply bottlenecks and forecasts of increased demand from China supported the growth of these metals.

Outlook for the rest of the year

The outlook for base metals is largely dominated by macro forces such as the US dollar, demand from China, energy prices and global growth projections. The metals industry had an extremely volatile trading year that ended in the red last year due to geopolitical headwinds.

That headwind began to ease earlier this year when China abandoned its zero-tolerance policy for Covid-19.

It is worth mentioning that China is the world's largest consumer of base metals. The country's construction industry is the largest consumer of copper, aluminum and zinc, while the manufacturing industry consumes significant amounts of nickel and lead.

There are expectations that demand for base metals from China is likely to remain strong for the rest of the year. Recovery from the covid pandemic is on track thanks to increased consumption in the Middle Kingdom. Recently, key investment banks raised the country's economic growth forecast after impressive GDP growth in the first quarter of this year. Additionally, hopes for a US central bank rate cut helped the green dollar correct its decline from a XNUMX-year high last year. Since most globally traded goods are priced in the US dollar, a weak dollar makes commodity prices cheaper compared to other currencies. This usually stimulates demand and supports prices.

Fed policy and sanctions in focus

Aggressive interest rate hikes by Fed last year were a challenge for all asset classes around the world. In 2023, US policy makers took a different approach, accelerating at a slower and more deliberate pace. This could further weaken the US dollar and support commodity prices.

The global energy landscape has changed dramatically since the imposition of sanctions on Russian oil and natural gas. Now prices have cooled down and global gas prices have fallen sharply since the beginning of this year amid demand concerns, while the oil market balance has also seen a sharp correction in oil prices supporting economies around the world.

A spoonful of tar in a barrel of honey?

However, the uncertain global economic outlook linked to turmoil in the financial sector, high inflation, the ongoing fallout from the Russian invasion of Ukraine and three years of pandemic could prevent the metals sector from making significant gains.

Looking ahead, the metals industry remains volatile with a mild positive outlook. Admittedly, initially investors were concerned about the results of the US Fed's policy decisions and the history of economic growth in China. A positive signal for the industry may also be the forecast of a lower probability of a sharp increase in energy prices in the world.

On the other hand, projections of a fragmented global growth outlook and growing fears of a recession could limit strong gains for the rest of the year.