China stimulus improves risk/reward basis for industrial metals
2024.10.15 09:44
Investing.com – The market became increasingly bearish on industrial metals during the third quarter, according to UBS, but US rate cuts and the coordinated stimulus by China in October have improved the risk/reward basis.
The moves to stimulate the Chinese economy announced so far are unlikely to be as material as the 2008/9, 2015/16 and post Covid upcycles, analysts at the Swiss bank said, in a note dated Oct. 14.
However, “it appears more coordinated, urgent and material versus the largely ineffective ‘drip-feed’ stimulus over the last 12-18 months and as a result in our opinion it does improve the risk/reward for industrial metals/ the miners, reducing the tail risk of further deterioration/contraction in US/China metals demand,” the bank said.
That said, to support the recent gains and drive further upside, the bank needs to see more detail on China’s fiscal stimulus; improvement in real data (macro & physical commodity demand); and visibility on the US elections/ trade tensions.
Looking at the individual industrial metals, prices have rebounded, but (unlike in 2Q) fundamentals had been improving even before the China stimulus announcements.
“We continue to expect tightening in the physical market over the next 6-12 months driven by improving demand & limited upside to refined output. We believe the re-rating (which has been happening over the past 10 years) for large-cap copper pure plays is structural and likely to continue,” UBS said.
Near-term we expect alumina prices to remain elevated with China struggling to source additional bauxite (domestically & from Guinea); we expect high alumina prices to provide near-term cost-support for aluminum while demand remains mixed/soft. We expect fundamentals to improve during 2025 with China supply capped and demand to recover; this will support sustainable price upside.
Long positioning in gold is elevated, UBS added, but believe there is plenty of investor interest to hold gold as a portfolio diversifier in an environment of monetary policy easing.
The nickel market has been in considerable surplus, but supply cuts are rebalancing the market and we see a more balanced price outlook, UBS added.
Iron ore fundamentals continued to deteriorate in 3Q24 on softer demand/stronger supply, but we see the recent China stimulus offering some downside protection to prices.
China stimulus will likely have some demand implications for the lithium markets, but we still see the market as oversupplied and remain cautious.
