Concerto for brass

USD 10,000. The figure resonated like a vibrato in the lively concerto accompanying the industrial metals market for the last few months. USD 10,000 is the price per tonne for copper, based on the futures currently traded on the market. An unprecedented level for the last two years, a symbol of the recent rally in the best-known of the industrial metals, whose price has leapt 15% since the beginning of the year.

There are structural reasons for this. On the one hand, supplies are dwindling, with copper stocks very low across the world and production capacity significantly reduced in recent years, in particular, after the closure at the end of November of the gigantic open-pit copper mine operated in Panama by the Canadian group First Quantum. On the other hand, demand will accelerate in coming years, due to the growth of data centres across the world and (green) infrastructure plans being rolled out across the US and Europe. There is thus a high risk of copper shortages in the coming quarters, which is likely to continue to push up the price. And this is all the more likely as supply side issues may be aggravated from time to time by record droughts in many mining territories, and water is an essential resource for extracting metals. In parallel, the rise in demand will be amplified by the economic cycle as destocking in China comes to a close and the country therefore returns as a buyer on the global market.

However, it is clear that copper is not the only metal affected by this rapid rise in prices. This is also the case for nickel and, to a lesser extent, for zinc and aluminium. Traditionally, a bounce in industrial metals prices is seen as a good indicator of a cyclical upturn in the economy. In the current environment, this signal corroborates the message being sent by numerous indicators in recent months, both sentiment indicators such as the global manufacturing PMI which recently moved into expansionary territory for the first time since mid-2022, as well as “hard” data such as the increase in road and rail freight.

Yet this cyclical upturn is still weak. The latest PMI data for the manufacturing sector was disappointing both in the US and the eurozone, with companies citing destocking that had not yet finished, lacklustre demand and low buying momentum. Industrial production remains modest on both sides of the Atlantic, and in the US, capital goods deliveries are down. And even if the outlook continues to improve, some caution is advisable for cyclical stocks, which are overbought in the short term and trading on relatively unattractive valuations, reflecting over-anticipation of a cyclical improvement, which is real enough, but for which the tempo is adagio rather than allegro.

Final version of 26 April 2024 – Enguerrand Artaz, Fund Manager, LFDE