Are metal prices dropping?

This blog post is part of a special series based on the 2023 Commodity Market Outlook, a flagship report published by the World Bank. This series features concise summaries of commodity-specific sections extracted from the report. Explore the full report here.


The World Bank’s Metals and Minerals Price Index experienced a slight decrease of 0.13 percent in 2023Q4 (q/q), continuing steady declines that began in early 2022. This decline is attributed to slowing economic activity in major economies, which has dampened demand amid continued supply recoveries for some base metals. Metal prices are expected to fall 5 percent in 2024, after declining nearly 10 percent in 2023 (y/y). They are projected to stabilize in 2025 (y/y). Key risks to these price predictions include weaker-than-expected demand from China and advanced economies or major disruptions to production. An escalation of the latest conflict in the Middle East could also disrupt trade and therefore prices. 

 

Subdued global demand. Metal demand growth slowed to 0.6 percent in 2023Q3 (q/q) as global manufacturing activity remained subdued. This trend aligns with the global manufacturing Purchasing Managers Index, which consistently indicated contraction throughout the year. Monetary tightening in advanced economies weighed on consumer demand for metal-intensive durable goods. Despite a weakened property sector, demand from China’s infrastructure and manufacturing sectors, the energy transition, and optimism regarding policy stimulus to shore up economic activity supported China’s metal demand.

 

A modest recovery in metals supply also weighed on prices. Metal output increased in the first three quarters of 2023 (y/y), following production disruptions in 2022. Nickel production grew 15 percent for the period January to September 2023 (y/y), with increasing supply coming mainly from Indonesia, the world’s largest nickel producer. Even with production disruptions in Chile in early 2023, which is the world’s largest copper producer, global copper production rose by 7 percent for the same period in 2023 (y/y). This growth is attributable to capacity expansions in other major producers, including China and the Democratic Republic of Congo. On the other hand, production growth of energy-intensive metals, such as aluminum and zinc, remain subdued as major European smelters have not fully recovered following closures in 2022 due to high energy costs.

 

Metal prices are forecast to fall by 5 percent in 2024, before stabilizing in 2025. The World Bank’s Metal Price Index is expected to fall 5 percent in 2024. Among various metals, the largest price decline is expected in nickel, followed by aluminum, tin, zinc, lead and copper. Prices are expected to inch up in 2025, with price increases ranging from 2 percent for lead to 9 percent for aluminum. 


 

The price outlook is subject to several risks. The primary downside risk to the price forecasts lies in a sharper slowdown in activity among advanced economies and China, which could further weaken metal demand in 2024. Trade restrictions and other policy actions, such as sanctions on Russia and China’s impending aluminum cap, could tighten metals supply and push up prices. An escalation of ongoing conflict in the Middle East could lead to substantial disruptions in energy markets, increasing production costs for energy-intensive metals. Other short-term risks include environmental concerns, labor disputes, adverse weather conditions, or technical problems can disrupt mining operations and adversely affect the supply of metals in several regions, especially Africa, the Americas, Australia, and Indonesia. In the longer term, an accelerated energy transition would further support prices of some base metals—notably aluminum, copper, nickel, and tin. 
 

After powering to new highs in the Spring, metal prices continue to slide. Iron ore, aluminum, and copper have all fallen to varying degrees, and those merely represent the largest volumes. Meanwhile, the bulls continue to retreat while demand fears trump supply fears.

Prices surged earlier this year based on several predictions. The first was that rapidly rising energy costs would restrain supply. The second being that the loss of Russian supply would drive prices up. However, long positions continue to cut as the market factors in concerns that those very same high energy prices are pushing Western economies into recession.

In the short term, sharp rises in interest rates by central banks continue to put further pressure on investors’ expectations for higher prices. Of course, even these spikes are largely due to energy costs pushing up inflation.

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China’s Every Move Affecting Metals Prices

Following suit with most cases for most metal prices, China is the main driver responsible for pushing costs both up and down. And with nothing but bad news coming out of the Middle Kingdom, it’s hardly surprising that – for the time being – most experts anticipate continued weakness.

China’s Caixin index, which reports on industrial activity, officially entered negative territory last week when order levels fell. This came after two months of continued expansion. The country continues to struggle in the face of repeated localized lockdowns and power rationing. Both are mainly due to droughts, which have shuttered manufacturing across many provinces.

Power constraints are starting to relax, but one of the main planks of the economy, the construction sector, remains mired in debt. Many developers are unable to complete projects, and buyers continue to threaten to stop mortgage payments for properties bought “off plan.” This is because it’s not unusual for Chinese buyers to complete or start paying the mortgage while the property is still under construction.

Beijing has so far made modest reductions in interest rates – contrary to nearly every other major economy in the world. However, these moves have hardly impacted the property sector at all.

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Rising Interest Rates Threaten Metal Prices Further

Meanwhile, the dollar continues to strengthen while interest rates creep up elsewhere (most notably in the US). When the dollar rises, commodity prices (usually traded in dollars) tend to fall and become more expensive in other currencies.

The dollar has already hit parity with the Euro. It also recently hit levels against the pound not seen since the 1980’s. This caused investors to turn away from Europe and the UK due to the same recession fears impacting metal prices.

EU flag in front of Berlaymont building facade

Those catastrophic supply constraints haven’t gone away, either. Copper, in particular, has very dodgy fundamentals, and aluminum, zinc, and copper are all at extremely low inventory levels on the LME and CME.

At some stage, the dearth of physical metal and lack of investment in new mining projects will seriously impact raw material supply. However, it’s the impact of rising energy costs that is of immediate concern, at least in Europe.

Non-Ferrous Metals Feeling the Strain

A recent FT post reiterated dire warnings from Europe’s nonferrous metals trade body, Eurometaux. The article highlighted the “existential threat” of partially or fully shuttering manufacturing in the face of unimaginable power costs. Specifically, these decisions may endanger the long-term survival of Europe’s smelting industries as aluminum, zinc, copper, ferro chrome and, by extension, EAF steel.

While the region was always a high-cost power location, smelters generally operated under preferential long-term power agreements. Some of those link to current market prices, but many fixed contracts expire at year’s end.

Unless Brussels steps in with massive support measures such as subsidies or enforced price caps, many more smelters will close this winter, meaning metal prices will continue on an erratic path. Some of them may never reopen. For now, recessionary fears dominate the decision-making. However, many experts consider energy costs the proverbial “sleeping dragon.” Now, the dragon is stirring.

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