Analysis of the Impact of the U.S. Federal Reserve's Rate Cut on Commodities: Outlook for Aluminium, Copper, and Steel Prices
09-20
Following the U.S. Federal Reserve's decision to end its four-year rate hike cycle with a sharp 50-basis-point rate cut, the global commodities market is expected to see significant effects, particularly for industrial metals like aluminium, copper, and steel. This article draws on insights from Goldman Sachs and other financial institutions to assess how the rate cut will influence these key commodities.
1. Aluminium Market: LME vs. SMM Aluminium Prices
Weaker Dollar and Global Demand Growth
The Fed's rate cut weakens the U.S. dollar, which could push up the price of LME aluminium, as commodities priced in dollars become cheaper for non-dollar buyers. According to Goldman Sachs, global economic recovery will boost industrial metal demand, with aluminium prices potentially reaching $2,600 per mt by the end of 2024. Lower borrowing costs will encourage investment in sectors like automotive, construction, and aerospace, driving increased demand for aluminium.
China's Demand Recovery and SMM Aluminium Prices
China, the world's largest aluminium consumer, plays a crucial role in influencing SMM aluminium prices. As China implements its own monetary easing policies to boost infrastructure and real estate investment, domestic aluminium demand is expected to rise. This demand recovery is likely to drive up SMM aluminium prices. Furthermore, the global supply chain—particularly fluctuations in the availability and cost of bauxite and alumina—could also impact China’s aluminium market.
2. Copper Market Analysis
Global Demand Recovery and Copper Price Surge
Copper, often considered a barometer of the global economy, stands to benefit significantly from the rate cut. Goldman Sachs forecasts that copper prices could rise to $10,000 per mt by the end of 2024. The lower borrowing costs resulting from the Fed’s rate cut will fuel investment in electrification projects and green energy transitions, which will increase copper demand. China's investments in electric vehicles and grid expansion will further boost the copper market.
Dollar Weakness and Copper Prices
Like aluminium, copper prices are also sensitive to dollar fluctuations. A weaker dollar makes copper more affordable for international buyers, potentially driving up demand. As global industrial activity revives post-rate cut, copper prices are likely to strengthen. However, the market could still face supply chain disruptions and inventory concerns, which may cause price volatility.
3. Steel Market Analysis
Infrastructure and Construction Boost Steel Demand
Steel prices are closely linked to global economic conditions, particularly in construction and infrastructure sectors. The Fed's rate cut will reduce financing costs for construction projects, leading to increased steel demand. As governments in emerging markets, such as China and India, ramp up infrastructure investments, steel demand will likely grow, supporting higher prices.
Energy Costs and Supply Chain Dynamics
Steel production is energy-intensive, and the rate cut could lower energy costs, reducing steel production expenses. However, the global steel market still faces supply chain uncertainties, such as raw material costs and logistics challenges. While demand is expected to rise, these issues could temper the pace of price increases in the steel sector.
4. Conclusion
The U.S. Federal Reserve’s rate cut has broad and positive implications for the commodities market, especially for aluminium, copper, and steel:
- Aluminium: Global demand growth, coupled with a weaker U.S. dollar, will likely push up LME and SMM aluminium prices. The recovery in manufacturing and infrastructure investments will further support aluminium price increases.
- Copper: Benefiting from the global transition to electrification and green energy, copper prices are expected to rise, with strong demand driven by economic recovery.
- Steel: Infrastructure projects and construction investment recovery will drive steel demand, although price growth may be moderated by supply chain issues and energy costs.
Goldman Sachs and other investment banks predict that 2024 will be a critical year for the recovery of industrial metal prices, with rate cuts providing a key catalyst for the revival in demand
https://www.mining.com/web/goldman-says-commodities-to-gain-as-central-banks-cut-rates/
https://investingnews.com/goldman-sachs-commodities-forecast/