Industrial metals have been on the back foot so far this year, with recent worries over a trade war between the US and China undermining already weakening sentiment.
Worries over higher US inflation and further interest rate hikes from the Federal Reserve have also been weighing on industrial metals markets of late, as has been the case with risk assets in general.
Following the strong gains of 2017, industrial metals were arguably due for a pullback.
At the same time, given the signs of continued acceleration in the global economy, there were also plenty of valid reasons to remain bullish.
On one level, it’s quite normal to see commodity prices moderate as the economic cycle becomes more mature, especially as supply increasingly catches up, or even overtakes demand.
However, along with economic developments, political events have also come to bear on the market.
President Trump’s move in December to cut taxes and raise fiscal stimulus provided a natural boost to industrial metals and risk assets in general.
Trump’s more recent decision to impose tariffs on US imports has had quite the opposite effect.
A positive supply/demand balance and improving global growth momentum helped copper prices to rise by around 30% last year.
With China as by far the world’s biggest importer of copper, moves by the country to impose import restrictions on certain types of scrap copper were also supportive for prices.
Year to date, however, it’s been a very different story, with copper prices having fallen from around $3.3 to $3.1 per pound.
Following a somewhat euphoric surge in copper prices in December, the market entered a consolidation phase, trading in a relatively narrow range early in 2018.
In early February, as concerns over rising US inflation and higher US interest rates weighed on assets, copper experienced a fairly sharp sell-off.
While copper then rebounded as February progressed, appearing to stabilise as the optimism over the global growth outlook again dominated the market, this proved short lived.
Copper prices sank again in March, this time coming under pressure from the Trump administration’s moves to impose tariffs on US imports amid fears of an all-out trade war with China.
It’s been a similar story for iron ore, having slumped from around $80 to $65 per tonne over recent weeks.
Aluminium now stands out as a notable exception, with geopolitical events taking centre stage, though this time to the upside. Hence, aluminium prices have recovered to where they began the year.
In common with copper and iron ore, aluminium had been on a similar downward path until earlier this month when the US unveiled punitive sanctions targeting Russian oligarchs.
The price of aluminium surged by well over 10% as buyers across the globe sought out alternative suppliers to Rusal, the world’s second largest aluminium producer, which happens to be controlled by Russian oligarch Oleg Deripaska.
While US citizens are banned from conducting business with Rusal, in practice those from most major countries will be highly wary of buying from the firm for fear of reprisal.
As a result, shares in Rusal have dropped by over 50% within the past week.
The year 2018 could prove to be an interesting one for industrial metals, with the recent pick up in volatility across capital markets likely to present further trading opportunities.
On the one hand, increased risk aversion tends to have a dampening impact on the price of major industrial metals such as copper and iron ore.
Geopolitical events can also bring unexpected consequences, especially if supplies become more of an issue, as has been the case with aluminium.
As long as the global growth picture remains robust, then the demand side of the equation should still be supportive of prices.
Major global economies such as the US, China and eurozone continue to grow at a brisk pace, a factor that continues to underpin the industrial metals markets.
More specifically, the rise of electric cars continues to represent a boon for the more niche industrial metals, which are used to produce the batteries for electric vehicles.
For instance, cobalt has already surged by around 20% year to date, extending the strong gains the metal made during 2017.
Cobalt now trades at around $91,000 per tonne versus $36,000 per tonne at the beginning of 2017.