A significant retreat in base metal prices has unfolded amid a wave of profit-taking, marking a stark reversal from recent highs. Copper, leading the decline, has plummeted to $US9587 per tonne, an eight-week low and a 13% drop from its peak above $US11,000 in the previous month. Similarly, aluminium has dipped below $US2500 per tonne to a two-month low, while nickel’s decline has extended to 20% from its May highs.
The sell-off, driven by traders capitalizing on recent gains, comes after metals surged to multi-year highs on supply concerns and bullish sentiment surrounding demand from the energy transition. Analysts suggest that the correction was overdue, emphasizing that prices had become detached from underlying fundamentals, with speculative investors driving the market momentum.
“There were initial supply issues, but the rally became increasingly speculative,” commented Vivek Dhar, commodities analyst at Commonwealth Bank. “As traders took profits, the focus is now back on fundamental factors to guide price movements, albeit with uncertainty on where prices will stabilize.”
The downturn was exacerbated by weak economic data from China, the world’s largest consumer of industrial metals, showing a slowdown in industrial output and fixed asset investment, alongside a deepening housing slump. Property prices in 70 major cities declined by 0.7% in May, the sharpest drop since October 2014, reflecting subdued consumer confidence.
Robert Rennie, head of commodity and carbon strategy at Westpac, correctly predicted copper’s retreat below $US10,000 per tonne and anticipates further decline to $US9500 per tonne. He pointed to surging copper inventories at Shanghai Futures Exchange warehouses, well above the five-year average for this period.
Despite the current downturn, analysts like Mr. Rennie foresee a rebound in copper prices, noting disruptions in Chilean production due to severe weather conditions that have impacted mining operations. Codelco and Anglo American, major producers in Chile, implemented contingency plans following heavy rains that disrupted transportation and power supply.
Looking forward, Citi and Bank of America see potential buying opportunities emerging amid price consolidation in the $US9500 to $US10,500 per tonne range for copper. Citi predicts prices could reach record highs of $US12,000 by year-end, while Bank of America remains cautiously optimistic about aluminium prices due to tight physical market conditions despite increased production in China.
In conclusion, while current market conditions reflect a sharp correction, analysts view this phase as a potential entry point for investors eyeing a resurgence in base metal prices driven by supply disruptions and future demand growth prospects.
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