Industrial metals are on track for their worst quarter since the 2008 financial crisis as fears of a recession hit prices. Last week, copper prices fell into a bear market from record levels four months ago, while tin prices fell 21 per cent, the worst week since the 1980s, when trading in London was frozen for four years.
This is a dramatic reversal from the past two years, with metal prices soaring after the outbreak as market sentiment turned optimistic, inflation forecasts rose and supply disruptions persisted. Today, inflation has arrived and supply is still tight, but metal prices have plummeted on fears of a slowdown in industrial activity in major economies.
In view of the application of copper and other metals in heavy industrial machinery and advanced electronic products, its price is closely related to economic prospects. The fall in prices indicates that the efforts of various countries to control prices are achieving some initial results. There are signs that traders are betting that copper prices will fall further. Amelia Xiao Fu, head of international commodity strategy at Bank of China, said by telephone:
"even if Chinese demand recovers in the second half of the year, it will not be able to push prices back to new highs alone. That era is over and other major economies are heading for recession."
On Thursday, the S & P global index showed that European manufacturing output shrank for the first time in two years, while US output hit a 23-month low. At the same time, the accelerated sell-off of copper and other industrial metals by investors suggests they expect demand to fall sharply in the coming weeks.
Copper on the London Metal Exchange hit a 16-month low of $8122.50 a tonne on Friday and is down 11 per cent so far in June and is on track for its biggest monthly drop in 30 years. Aluminium and zinc also tumbled, with the Bloomberg industrial metals spot index falling 26% in the quarter, the biggest drop since the end of 2008. Tin has more than halved from its March peak.
Metals have been hit harder than other commodities such as crops and energy because they are more affected by the conflict between Russia and Ukraine. Since the end of march, the Bloomberg energy spot sub-index has risen 10%, while the corresponding agricultural index has fallen 9.7%.
However, copper and other metals still face some of the tightest supply conditions in history. With global inventories dwindling and there are few signs of significant new supply, even staunch copper bulls such as Goldman Sachs (300.78,-1.97,-0.65%) have warned that demand may need to be undermined to ease supply pressures.
Industrial metals began to tumble after the Fed raised interest rates by 75 basis points earlier this month, and the Fed could trigger a recession as it tries to control inflation. Although investors in other markets expect the Fed's rate-raising cycle to end early, the sell-off accelerated last week.
The Fed warned that it had little impact on the supply-side drivers supporting the surge in commodities such as crude oil, while demand for necessities such as gasoline and food would remain resilient as consumer financial pressure increased.
But the Fed's rate hike is likely to have a more direct impact on discretionary spending, potentially reducing demand for metals in areas such as real estate, carmaking and durable goods. As manufacturers' borrowing costs rise, so does demand risk in areas such as construction and industrial machinery, which account for the bulk of overall metal use.
London Metal Exchange (LME) data show that the recent slump is more due to investors giving up their bets on rising prices, while bearish positions have been flat for most of this month.