Why have prices of industrial metal commodities risen in the past 3 months?

27 May 2024 , 05:13 PM

Prices of industrial metal commodities have risen since March 2024. Copper price has increased from $ 3.7 per pound at the start of March to $ 4.736 per pound on May 27^th. This is an increase of 28% in the period. Aluminum price has risen from $ 2221 per ton at the start of March to $2662 per ton. This is an increase of 19.8% in the period. Zinc has risen from $2,389 per ton at the start of March to $3,057 per ton on 27^th May. This is an increase of 27.9%. Other industrial commodities have shown similar price trends. According to The Economist Commodity Price Index, as on 14^th May, 2024, industrial commodity prices, on average, are up by 14.6%.

Causes for increase in prices of industrial commodities

Industrial commodities are metals and other commodities that are used as raw materials in the production of other goods. The increase in the price of industrial commodities this year has been because of three factors. One is the expectation that economic growth in countries around the world will pick up as central banks start cutting down interest rates. Lower interest rates tend to increase demand in the economy. Interest sensitive consumption and investment pick up when interest rates go down. This in turn increases demand for industrial commodities.

The other factor is the expectation that China’s economy will pick up in 2024 after three years of economic devastation because of draconian Covid lockdowns. China is a huge manufacturing powerhouse. An economic recovery there will drive up the demand for commodities.

A third factor is increase in demand for Electric Vehicles (EVs). Commodities such as copper find more use in EVs than in conventional gasoline driven cars. A typical EV needs four times more copper in its manufacturing than what a typical gasoline driven combustion engine car needs.

When will central banks start cutting down interest rates?

The rise in price of industrial commodities in the past three months has been due to some actual increase in demand and some on the expectation that demand will go up in future. Interest rate cut cycle has still not been started by US Federal Reserve or other major central banks.  European Central Bank has said that it will start cutting down interest rates from June. China’s economic recovery continues to be fragile. Demand remains weak there. The real estate sector is in severe crisis. However, China’s EV manufacturing sector has emerged as a powerhouse.

Commodity prices may show some price reversal if interest rate cuts by major central banks are not as per expectations. If economic recovery does not happen as per expectations, then also commodity prices may see some downward pressure.

On MCX, Copper futures for June delivery is currently trading at around Rs 896 per kilogram.  Copper futures for September delivery at CME are trading currently at $4.7490 per pound. This is slightly higher than the current spot price of $4.736 per pound.