Copper futures are at all-time highs on major Chinese markets, while they trade at two-year highs on futures platforms like the LME and MCX. Aluminum prices are currently at record highs in Indian markets, gaining more than 20 percent since the start of the year.
The resurgence of manufacturing activity in the world’s largest economies, such as the United States and China, is attributed to a rise in demand for industrial metals.
U.S. manufacturing activity saw its first expansion in March after a 16-month contraction. Manufacturing sector figures in the country surprisingly jumped to 50.3 against expectations of 48.4 last month.
China’s manufacturing PMI data also showed a positive trend. The country’s PMI figures reached 51.1 in March, the fifth consecutive month of growth in the country. A recovery in manufacturing activity among the world’s major commodity consumers indicates a recovery in demand for industrial raw materials, particularly copper and aluminum, which are the world’s most widely used base metals. In addition, there are concerns about supply bottlenecks. Recently, the United States and the United Kingdom imposed new sanctions on Russian metals, including copper, aluminum and nickel. The aim was to reduce Russian revenues from exports of metals needed for its military operations in Ukraine. After the new sanctions against Russian metals, the London Metal Exchange and the Chicago Mercantile Exchange announced that they would no longer trade new aluminum, copper and nickel produced by Russia. This has sparked supply concerns, adding further pressure to global commodity markets.
However, global production of copper and aluminum has seen steady growth in recent years.
A notable increase in production from China, the main player in raw materials, was also observed in March. The resumption of production after the Chinese New Year holidays and the return of foundries to their normal activities contributed to this increase.
Escalating hostilities in the Middle East could also fuel volatility in metal prices. The recent Israeli attack on Iranian soil has increased concerns over critical shipping routes in West Asia, contributing to an increase in prices of industrial raw materials.
Another reason for rising commodity prices is the hope of lower interest rates in the United States. Lower rates can boost borrowing and spending by consumers and businesses, which can boost industrial growth and therefore prices.
The diversification of assets of different central banks also supports commodity prices. In recent years, central banks around the world have increased the diversification of their assets into commodities, leading to increased demand.
Going forward, as prices approach their multi-year highs, there are chances of a technical correction, but such moves are unlikely to lead to a major sell-off. As supply-demand dynamics support prices, the current positive sentiment will remain intact in the near term. However, any sign of supply exceeding demand would require significant liquidation pressure later.
(The author Hareesh V is Head of Commodities at Geojit Financial Services. Opinions are his own)
