Industrial metals: Diverging trends

The performance of the industrial metals has been diverging as of late.

Aluminium reached a new yearly high above USD 1,680 per tonne yesterday. The market remains supported by an unexpectedly slow return of previously closed Chinese production.

During the first half of the year production was down 3.3%, the first decline in seven years. Given that profitability in China’s aluminium industry has improved, we believe the declines will be transitory and growth will resume over the coming months.

Hence, we see more downside than upside for aluminium going forward and reiterate our cautious view. Meanwhile, copper showed renewed weakness, suffering from ongoing sluggishness in China’s manufacturing sector and continued growth in global mine production.

Thus far this year, mine production is up more than 5%, which was propped up by a 50% increase in Peru, the world’s number two.

Further growth is projected for the remainder of the year. Overall, the copper market remains well supplied, which is also reflected in elevated smelting margins.

These usually increase in times of ample supplies while contracting in times of tight supplies. Following recent weakness, we have shifted our view on copper to neutral while leaving our three and twelve-month price targets unchanged at $4,600 per tonne. Nevertheless, price risks are skewed to the downside rather than the upside.

Price trends have been diverging among the industrial metals as of late. Strength in aluminium should be transitory given the outlook for resuming Chinese production growth. Weakness in copper should persist against the backdrop of sluggish demand in China and growing global mine production.

Carsten Menke is Commodities Research analyst at Julius Baer

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