Base metals is set to finish the year with a bang, staging a solid rally in the final quarter.
The London Metal Exchange Index has soared approximately 18% since the start of the year, with a notable 9% jump since early September, though the contributions of individual metals have varied significantly, with copper emerging as the standout winner.
The red metal achieved a new all-time high of just over $11,000 per ton in the middle of October.
“The driving force behind the price increase is concerns about a shortage of copper ores, as mine production has grown less dynamically in recent years and now risks falling behind demand,” Thu Lan Nguyen, head of FX and commodity research at Commerzbank AG, said in a report.
Production cuts
Unexpected production cuts have increased these concerns. Public protests led to the shutdown of Panama’s largest mine, for example.
The situation has been further complicated by additional production disruptions in Chile and Peru—the world’s two most critical mining nations—due to accidents and continued protests.
“The strongest indication of a shortage in raw materials comes from the treatment and refining charges that mining companies pay to copper smelters for ore refining,” Nguyen said.
These fees fell into negative territory at the beginning of this year in China, the most important producer country, meaning that Chinese copper smelters are currently paying mining companies to obtain copper ores.
However, the market appears to have largely priced in this concern already.
Currently, the official production data shows no evidence of supply shortfalls.
China’s metal production, which represented 44% of the global total last year (based on USGS data), saw a 13% increase in the first nine months compared to the same period in the previous year.
Production in August nearly reached the peak recorded in June.
Furthermore, copper ore imports remain robust, up approximately 7% year-to-date, despite a minor recent decline.
Aluminium market
Meanwhile, the aluminium market presents a somewhat different scenario compared with copper.
China’s metal production, which has historically driven significant growth and accounts for approximately 60% of the world’s primary aluminum output (per the International Aluminium Institute), has recently experienced a period of stagnation.
Due to a government-mandated annual production limit of 45 million metric tons (or 123,200 tons per day), smelters may soon need to slightly scale back operations.
Daily production has recently averaged 123,800 tons, which is marginally above this imposed cap.
Robust demand for aluminum is indicated by a 6% year-over-year increase in imports after ten months.
“However, this is likely mainly due to Chinese companies purchasing Russian aluminum at favorable terms since the outbreak of the Ukraine war,” Nguyen said.
Since early 2022, monthly imports have seen a five-fold increase compared to the average of the preceding four years.
Concurrently, the proportion of these imports sourced from Russia has jumped significantly, rising from a monthly average of about 30% to 70%.
Supply shortages outside Asia
Nguyen added:
The stagnating production in China and reduced supply from Russia may explain why supply shortages outside Asia are increasingly evident.
European premiums for aluminum imports are once again increasing.
This rebound suggests that the initial effect of US tariffs—which had previously depressed premiums by shifting supply outside the US—is now diminishing, according to her.
However, relief might be imminent, as the Chinese domestic economy—the primary market for metal sales—has shown a notable slowdown in recent months.
The real estate market’s deterioration is particularly worrying, with home sales dropping approximately 20% year-on-year in October and housing starts seeing an even sharper decline of almost 30%.
The construction sector continues to be a major source of demand for both copper and aluminum, despite their extensive use in other industries essential to the energy transition.
The construction sector is a significant consumer of both copper and aluminum, representing approximately 34% of the total copper demand and 24% of the total aluminum demand, according to European Commission data.
Outlook
“Against this backdrop, we anticipate demand-side disappointment and therefore headwinds for copper and aluminum prices in the coming months,” Nguyen added.
At the same time, persistent supply concerns should prevent a steeper drop in prices.
In the medium term, copper production in China, and potentially other commodities, is expected to slow down.
This is less a concern of raw material scarcity and more a result of stricter government controls.
The Ministry of Industry and Information Technology recently announced a significant change for the top 10 non-ferrous metals, which include copper and aluminum.
Specifically, the production growth rate for these metals is now targeted to average only 1.5% this year and next.
This is a notable reduction compared to the average growth rate of approximately 5% seen over the past two years.
The announcement was made in late September.
“We therefore expect copper and aluminum prices to continue rising next year, reaching USD 12,000 per ton and USD 3,200 per ton, respectively,” Nguyen concluded.
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