Base metal price downside should be limited from here: BofA By Investing.com

Base metal prices eased after a strong rally in the second quarter of 2024 and notably gave back most of their year-to-date gains on concerns about weak demand and economic uncertainty.

However, BofA Securities suggests that downside risk to base metal prices may be limited from this point forward. The brokerage anticipates that various factors, including potential Federal Reserve interest rate cuts, a rebound in demand after the summer and the resolution of trade disputes, could support metal prices through 2025.

The most pressing issue for base metal prices is the current slowdown in manufacturing activity that has been evident globally. Weak sentiment among manufacturers led to a reduction in industrial inventories, exacerbating downward pressure on prices.

Despite this, BofA points out that fundamentals for metals remain relatively robust. Physical markets are tight, as evidenced by strong copper premiums in the US and Europe, and supply issues for copper and aluminum persist.

Production activity

Recent surveys of purchasing managers indicate a decline in manufacturing activity in the US, Europe and China. For example, China’s NBS manufacturing PMI remained in contractionary territory at 49.4 in July, reflecting weaker demand and reduced output. Similarly, the US Institute of Supply Management (ISM) reported weak demand and declining production execution.

Stocks and premiums

• Despite the recent build-up of inventories in China, particularly in SHFEs and warehouses, inventories are still at the bottom of long-term ranges. Chinese copper premiums rose from -$20/t to $60/t, suggesting a tentative return of buyers to the market. This resistance in physical markets supports the view that further price declines may be limited.

The role of Federal Reserve policy

The Federal Reserve’s monetary policy is a critical factor influencing base metal prices. Tight monetary conditions reported in the latest US PMI are putting pressure on manufacturers. However, anticipated Fed rate cuts could ease some of these pressures. Lower rates are expected to benefit other sectors, including construction, which is a significant consumer of metals.

1. Fed rate cuts

   • BofA Securities estimates that the Fed may initiate interest rate cuts starting in September, with further cuts expected by mid-2026. Historical data shows that easing cycles can have a positive impact on metals prices if they are accompanied by a rebound in manufacturing activity.

Thus, a more accommodative monetary policy could support metal prices, provided there is a concomitant improvement in demand.

Trade disputes and geopolitical risks

Trade disputes, particularly between the US and China, are an ongoing concern for metals markets. Both US presidential candidates are expected to continue policies that prioritize reducing dependence on rivals and promoting US leadership in high-tech industries. The extent of tariffs and trade barriers will significantly influence the metals market.

1. The impact of trade policies

However, BofA Securities notes that if trade tensions do not escalate further, downside risks to base metal prices may be limited.

Outlook for Base Metal Prices

Given the current economic environment, BofA Securities maintains a constructive outlook on base metal prices through 2025. Key factors supporting this view include:

1. Potential return of demand

   • The usual post-summer rebound in demand could provide support for metal prices. In addition, if the Chinese economy shows signs of stronger growth and replenishment activity picks up, this would further boost prices.

2. Support from green technologies