Industrial metals are showing strong momentum, with copper prices nearing record highs driven by an exceptionally tight physical market, according to a recent analysis by China Securities Co., Ltd. The report highlights that while some profit-taking has occurred at key resistance levels, the underlying drivers for further price gains remain robust, urging investors to maintain patience for the base metals sector.
Gold prices are temporarily constrained around the $4,500 mark, but the combination of employment and inflation data has reduced the likelihood of a rate hike before the midterm elections, keeping the yellow metal in a favorable environment. In the copper market, an unusually high cash premium on the London Metal Exchange underscores a severe inventory squeeze, with prices now just a stone's throw from breaking through historical peaks. Furthermore, the valuation of copper equities offers a compelling safety margin, with the sector trading at just over 10 times price-to-earnings based on a copper price of $10,000 per tonne.
Exploring the Base Metals Landscape
This week, the LME saw price movements of 1.1% for copper, -0.8% for aluminum, 0.6% for lead, 1.7% for zinc, and 1.4% for tin. The pricing of industrial metals is influenced by both "financial attributes" and "commodity attributes." From a financial perspective, the Federal Reserve has already initiated a rate-cutting cycle. On the commodity side, global inventories of copper and aluminum are at relatively low levels, and the anticipated recovery of the Chinese economy, coupled with demand from the new energy sector, is expected to bolster consumption growth for these metals. The exceptionally high cash premium on the LME is a clear signal that copper prices are approaching their all-time highs.
Gold's Moderate Cool-Down
Gold prices are currently hovering around the $4,500 level as market optimism cools slightly. The US July inflation data showed a CPI year-on-year increase of 3.4%, the lowest since March this year, while the core CPI rose 2.5% year-on-year. Following the data release, market expectations for a Fed rate hike have cooled to around 35%. However, gold prices experienced some profit-taking after a rapid rebound, putting temporary pressure on the $4,500 mark. The probability of a rate hike before the midterm elections is steadily declining, creating a favorable window for gold. In the medium to long term, structural fiscal deficits in major economies, central banks' strategic gold purchases, and escalating geopolitical tensions all support gold's premium over sovereign credit systems. The World Gold Council's 2026 Central Bank Gold Reserves Survey indicates that 89% of central bank reserve managers expect global central bank gold reserves to continue increasing over the next 12 months.
Copper's Historic Rally
The LME cash copper premium over the three-month contract has surged to $434 per tonne, up from just $45 two weeks ago, marking the highest level since October 2021. This price structure, where near-term contracts are more expensive than longer-dated ones, highlights a severe shortage of inventory. The widening spread between Comex and LME prices is also a result of market bets on potential tariffs on copper imports announced by the President in September. The arbitrage opportunity of moving metal to the US is intensifying, depleting inventories outside of North America and tightening spot supplies. With the current copper price just a step away from the all-time high of $14,527.5 per tonne, the upward momentum is strong. Global copper mine production growth has fallen short of expectations again this year, leaving the refined copper market in a state of deficit. The combination of this structural shortage and the localized tightness caused by shipping metal to the US is keeping copper prices robust.
Aluminum's Supply Deficit
LME aluminum prices fell 0.76% this week, influenced by news that Emirates Global Aluminium's restart of production is proceeding slightly faster than anticipated. However, the year's production cuts of 2.86 million tonnes in the Middle East and the shutdown of 520,000 tonnes in Mozambique have created a global supply deficit of 1.2 million tonnes for primary aluminum. Inventories continue to decline both domestically and internationally, with domestic inventories dropping below the 900,000-tonne mark and LME stocks falling under 250,000 tonnes. While the Middle East has begun restarting and there are concerns about new capacity additions, these are future production increases and cannot resolve the current year's shortage. The short-term deficit will drive a rebound in aluminum prices, and the strong earnings performance of aluminum companies is expected to lift related stocks.
Key Risks
A significant global economic downturn could sharply curtail consumption, as recent years have already shown a trend of slowing growth. Uncontrolled US inflation and a more aggressive-than-expected monetary tightening cycle by the Federal Reserve could lead to a strong US dollar, which would be detrimental to dollar-denominated metal prices. A slowdown in the growth rate of the domestic new energy sector and continued weakness in the real estate sector could also negatively impact domestic consumption of certain non-ferrous metals.
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