China Securities has released a research report noting that the highly anticipated Federal Reserve September meeting delivered a 25-basis-point rate hike, alongside hawkish remarks from Fed Chair Warsh on combating inflation, which weighed on risk assets. However, given that risk assets had already fully priced in the September hike and an additional 25-basis-point increase later this year, prices have shown signs of bottoming out and recovering following the move. Assets with both financial and commodity attributes, in particular, have reverted to their own supply-demand fundamentals for direction. Copper, supported by low domestic inventories and scheduled maintenance at smelters, is once again pushing toward fresh highs, while aluminum is also targeting the 25,000 yuan mark, driven by an anticipated supply deficit this year. Below are the key views from China Securities.
Key industry data: This week, LME copper, aluminum, lead, zinc, and tin prices changed by 2.4%, 1.3%, 1.5%, 2.0%, and 0.5%, respectively. Industrial metal prices are jointly determined by their financial and commodity attributes. From a financial perspective, the Fed's 25-basis-point hike has now been delivered. From a commodity standpoint, global copper and aluminum inventories remain relatively low, China's economic recovery is expected to continue, and the pull from the new energy sector is set to improve demand growth for both metals.
Gold: September's rate hike met expectations, and gold prices have fully priced in the move. The Fed announced a 25-basis-point increase in the federal funds target range to 3.75%-4.00% at its September meeting. The precautionary hike landed as expected, but the overall tone was hawkish. The dot plot indicates one more 25-basis-point hike within 2026, with the median rate for end-2026 rising to 4.1% from 3.8% in June, though opinions diverge on 2027, with most expecting one additional increase. The Fed also raised its inflation forecasts, pushing its target for core PCE at 2% back to 2029. Gold prices had pulled back from the $4,700 per ounce level on rate hike expectations, and have since stabilized and rebounded after the hike materialized, fully pricing in the impact of two increases this year. Given high U.S. Treasury yields, pressured consumption, and diminishing marginal stimulus from AI, continued tightening would weigh on the economy, and fundamentals do not support sustained hikes. Meanwhile, geopolitical tensions and midterm election outcomes add further uncertainty. Therefore, it is premature to conclude a shift toward a prolonged tightening cycle. The September hike shock has passed and gold's bottom has been tested, but the ongoing tightening phase still caps upside potential.
Copper: Spot supply remains tight, driving prices toward new highs. Following the Fed's rate hike shock, and coinciding with the rollover of domestic futures near-month contracts, the backwardation structure shifted, and spot premiums for copper against the SHFE 2610 contract surged to an exceptionally high 660-810 yuan per tonne, closely tied to domestic spot inventories of just 89,000 tonnes. Meanwhile, copper concentrate treatment charges (TC) have tumbled to a historic low of negative $221.89 per dry tonne, and byproduct sulfuric acid prices have been declining for roughly two and a half months, squeezing byproduct profit contributions and intensifying pressure on smelting operations. Several domestic copper smelters are scheduled for planned maintenance from October to November, putting refined copper output under downward pressure. Although the Comex-LME copper price spread has turned negative, it is not yet sufficient to drive refined copper out of the U.S., leaving the tight inventory problem in non-U.S. regions unresolved. With the SHFE 2610 contract's open interest-to-warehouse warrant ratio staying elevated, and smelters following through on output cuts, copper prices are poised to challenge new highs once again.
Aluminum: Recent ODI approvals for projects are not yet indicative of a looser approval environment. BaiTong Energy recently announced it has obtained a certificate for overseas investment and a filing notice for an overseas investment project, unlocking the most critical step for its entry into Angolan aluminum smelting. Additionally, Hongwang Group's plan to build a 120,000-tonne aluminum smelter in Ruvuma, Tanzania, has completed non-sensitive overseas investment ODI filing in Loudi City, Hunan Province. The approvals of these two ODI projects have sparked market concerns that filing for overseas aluminum smelting investment may be easing. However, given the specific circumstances of these projects—BaiTong's initiative was launched as early as the end of last year, while Hongwang's smaller-scale project falls under provincial-level approval with provincial quotas—these cases do not provide a clear read on the broader ODI approval stance. Further observation is needed, and excessive worry is unwarranted. Electrolytic aluminum also faces a supply deficit this year, providing momentum for prices to challenge the 25,000 yuan per tonne level.
Risk analysis: 1. A sharp global economic downturn leading to a cliff-like contraction in consumption; 2. U.S. inflation spiraling out of control, with the Fed's monetary tightening exceeding expectations and a strong dollar suppressing equity prices; 3. Domestic new energy sector consumption growth falling short of expectations, with continued weakness in the property sector.
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