UBS House View Daily

Thought of the day

07.09 - My precious: Base metals not looking so base

Base metals have been getting more precious recently. Copper has hit its highest level in almost three years. And the broader index of base metals, which includes lead, zinc and nickel, has rallied 14% since the start of July and is up 24% this year – outpacing gold and global equities. The rally largely reflects the broad-based improvement in the global economy, which has lifted demand for industrial metals.
But while the global economic outlook remains positive, we believe most base metals will struggle to sustain such high prices.

  • Global demand growth for base metals should slow. China accounts for half of worldwide consumption of base metals. Government measures to curb credit creation and cool the property market should slow economic growth into next year. More economic activity outside China is unlikely to offset the drag.
  • The boost for base metals from a falling US dollar should come to an end. Since metals are priced in dollars, they have benefited from the 11% fall in the DXY dollar index since its peak at the start of the year. But we expect the US currency to stabilize as the Federal Reserve tightens monetary policy and markets price in a higher chance of corporate tax cuts.
  • Supply shortages in certain commodities, especially in lead, zinc and copper, remain. But they are not sufficiently acute to sustain the price rally in the face of weaker demand.

So, we believe returns on most base metals – including lead, zinc and nickel – will be negative over the coming six months.

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