Investing.com – According to UBS, the market turned increasingly bearish for industrial metals in the third quarter, but US interest rate cuts and China’s coordinated stimulus in October have improved the risk/reward basis.
The steps announced so far to stimulate China’s economy are unlikely to be as material as the 2008/9, 2015/16 and post-Covid upcycles, analysts at the Swiss bank said in an Oct. 14 note.
However, “it appears more coordinated, urgent and substantive compared to the largely ineffective ‘drip-feed’ stimulus of the past 12-18 months and as a result, in our view, improves the risk/return for industrial metals/the miners, raising the tail risk of a further deterioration/contraction in demand for metals from the US and China,” the bank said.
That said, to sustain recent gains and drive further upside, the bank needs to see more details on China’s fiscal stimulus measures; improvement of real data (demand for macro and physical commodities); and visibility on the US elections/trade tensions.
Looking at individual industrial metals, prices have recovered, but (unlike in the second quarter) fundamentals had already improved before the Chinese stimulus announcements.
“We continue to expect a tightening in the physical market over the next six to 12 months, driven by improving demand and limited upside over refined production. We believe that the revaluation (which has occurred over the past decade) for large-cap pure copper stocks is structural and likely to continue,” UBS said.
In the short term, we expect alumina prices to remain high as China struggles to obtain additional bauxite (domestically and from Guinea); we expect high alumina prices to provide cost support in the near term aluminum while demand remains mixed/soft. We expect fundamentals to improve in 2025 as supply in China is constrained and demand recovers; this will support a sustainable price increase.
Long positioning in gold Interest rates are high, UBS added, but believes there is enough investor interest to hold gold for portfolio diversification in an environment of monetary policy easing.
The nickel There is a significant surplus in the market, but supply declines are rebalancing the market and we see a more balanced price outlook, UBS said.
Iron ore Fundamentals continued to deteriorate in Q3 2024 on the back of weaker demand and stronger supply, but we think recent Chinese stimulus measures provide some downside protection to prices.
China’s stimulus measures are likely to have some demand implications for the economy lithium markets, but we still view the market as oversupplied and remain cautious.
