Room for copper to catch up after aluminum’s outperformance By Investing.com

Investing.com — Prices recently outperformed copper, but analysts at Morgan Stanley predict a potential reversal in favor .

While aluminum prices rose 11%, driven by a combination of rising input costs, strong demand from key sectors in China and temporary supply disruptions, Morgan Stanley believes copper is better positioned to benefit from improving conditions and market fundamentals.

The recent increase in the price of aluminum is primarily due to the significant increase in alumina costs. Alumina (OTC: ), a key ingredient in aluminum production, saw prices rise to nearly $520 a tonne.

This increase was passed on to consumers in the form of higher aluminum prices. Moreover, strong demand for aluminum in China, particularly from sectors such as solar energy, grid infrastructure and electric vehicles, further boosted the metal’s performance.

For example, grid spending in China is up 19% this year, helping boost aluminum demand.

“Long queues to withdraw metal from the key Port Klang depot have led to a tightening of short-term contracts, which may prove to be temporary. In contrast, copper was under pressure due to growing concerns over global growth and an overburdened position,” analysts said.

While aluminum prices have been strong, concerns are growing about the sustainability of this trend. Global aluminum production is now at a record high, with China returning to its role as a net exporter from May 2024.

As supply continues to increase and demand growth may stabilize, the momentum behind aluminum growth may begin to wane.

In contrast, copper has been under pressure over the same period. Its prices struggled amid concerns about global growth and the unwinding of previously overbooked market positions.

However, this poor performance may soon reverse. Analysts at Morgan Stanley see some encouraging signs that copper is poised for a recovery.

China’s copper demand indicators are showing signs of improvement. The Yangshan copper premium, which reflects the strength of demand in the spot market, rebounded, signaling that physical demand for copper is increasing.

In addition, inventories in China are beginning to decline, a development that reflects higher utilization rates at wire mills and a slowdown in refined copper supply growth.

These trends suggest that copper fundamentals are strengthening, setting the stage for a potential price rally.

Moreover, copper market positioning has become significantly cleaner. The sharp correction in copper prices brought net positioning closer to normal levels, reducing the risk of further liquidation.

This creates a more favorable environment for new investment flows into the market, which could lead to higher prices in the coming months.

Morgan Stanley remains bullish on both aluminum and copper for the fourth quarter of 2024. However, they believe copper has stronger potential to outperform aluminum due to its recent performance and improving market dynamics.

Despite this optimism, analysts warn that a deterioration in the global economy could have a more significant negative impact on copper than on aluminium, as copper is more sensitive to economic fluctuations.