Fed rate cuts only bullish for base metals if demand picks up

Investing.com
Updated
Mitrade
coverImg
Source: Shutterstock

Investing.com -- The recent pause in the rally of base metals is attributed to a combination of factors, including sluggish growth in China and a weakening US economy, said analysts at BofA Securities in a note dated Tuesday. 


Despite financial markets expecting nearly five Federal Reserve (Fed) rate cuts by the end of the year, such monetary stimulus alone may not be sufficient to boost the base metals complex. 


Historically, rate cuts have only been bullish for these metals when accompanied by a resurgence in manufacturing activity, a scenario that appears unlikely in the immediate future, they added.


Factors Affecting Base Metals


1. Economic conditions in China and the US

China's government has struggled to stimulate growth effectively, leading to concerns that the softness in industrial commodities could persist into the autumn and winter months. Concurrently, the US economy shows signs of weakening, further compounding the challenges for the base metals market.


2. Monetary stimulus and manufacturing activity

While monetary easing typically supports base metals, its effectiveness hinges on concurrent manufacturing activity growth. With current economic indicators suggesting a sluggish manufacturing sector, the anticipated Fed rate cuts may not lead to a bullish market for base metals as hoped.


Nickel market dynamics


1. Supply and demand fundamentals

In recent months, global nickel supply has stagnated while demand has increased, resulting in a market deficit. Indonesia’s RKAB (Work Plans and Budget) permitting initiative has temporarily reduced the country's nickel production, contributing to this shortfall. 


However, with the government approving 260 million tonnes of nickel ore production annually from 2024 to 2027, a re-acceleration of output is expected.


2. China’s nickel market

China’s investment in Indonesia has significantly altered the domestic nickel market. Increased imports of nickel pig iron have led to a multi-year low in domestic production, while refined nickel production has risen, turning China into a net exporter of refined nickel. 


This shift has introduced bearish pressures on nickel prices outside China, as Chinese-origin nickel now accounts for nearly 25% of inventories in London Metal Exchange (LME) warehouses, likely capping price increases.


Future outlook and challenges


1. Global nickel supply

Indonesia's strategic reconfiguration of its nickel industry, influenced by international regulatory pressures such as the US Inflation Reduction Act, suggests a shift towards a more balanced approach compared to the China-led foreign direct investment (FDI) strategy of recent years. 


While this could stabilize the market in the long term, it may also introduce new complexities and delays in supply chain adjustments.


2. Price forecasts

BofA maintains its average price forecasts for nickel at $17,707 per tonne ($8.03 per pound) for 2024 and $17,625 per tonne ($8 per pound) for 2025, reflecting a cautious outlook given the current market dynamics.

 

* The content presented above, whether from a third party or not, is considered as general advice only.  This article should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments.

goTop
quote
Do you find this article useful?
Related Articles
placeholder
Forex Today: US Dollar consolidates weekly gains as focus shifts to US confidence dataThe action in financial markets remain relatively subdued early Friday and the US Dollar (USD) Index consolidates its weekly gains at around 98.50.
Author  FXStreet
15 hours ago
The action in financial markets remain relatively subdued early Friday and the US Dollar (USD) Index consolidates its weekly gains at around 98.50.
placeholder
Dollar extends weekly rally as strong data delays fed cutsThe U.S. dollar looks set to record a second straight weekly rise against other major economies, driven by strong economic data that have eased worries about Fed rate cuts.
Author  Cryptopolitan
17 hours ago
The U.S. dollar looks set to record a second straight weekly rise against other major economies, driven by strong economic data that have eased worries about Fed rate cuts.
placeholder
USD/CAD trades with negative bias below mid-1.3700s, lacks bearish convictionThe USD/CAD pair drifts lower during the Asian session on Friday and moves away from a three-and-a-half-week high, around the 1.3775 region touched the previous day.
Author  FXStreet
17 hours ago
The USD/CAD pair drifts lower during the Asian session on Friday and moves away from a three-and-a-half-week high, around the 1.3775 region touched the previous day.
placeholder
US Dollar Index holds losses near 98.50 ahead of Michigan Consumer SentimentThe US Dollar Index (DXY) is retracing its recent gains from the previous session and hovering around 98.50 during the Asian hours on Friday.
Author  FXStreet
17 hours ago
The US Dollar Index (DXY) is retracing its recent gains from the previous session and hovering around 98.50 during the Asian hours on Friday.
placeholder
USD/CHF tumbles to below 0.8050 on tariff uncertaintyThe USD/CHF pair tumbles to around 0.8030 during the early European session on Friday.
Author  FXStreet
17 hours ago
The USD/CHF pair tumbles to around 0.8030 during the early European session on Friday.