Metals Rally Fueled by China’s Reopening, Tight Supplies

Behind the gains: a faster-than-expected reopening in China, where pandemic lockdowns lowered demand from the world’s largest consumer of commodities. Europe also dodged predictions that sanctions on Russia would lead to winter energy shortages, lifting demand from manufacturers and consumers. And in the U.S., signs of unexpected economic resilience have increased expectations for robust demand. 

Many analysts and portfolio managers expect continuing growth in the use of metals such as copper, lithium and zinc. That is because they are crucial to making the wind turbines, solar panels and batteries needed for the transition away from fossil fuels. Yet many also expect supply to lag behind demand because mining companies aren’t substantially increasing production.

“The usage is just exploding upward and physical inventories are quite low. Now the missing piece that really triggered everything was that people started accepting that China is back,” said Al Chu, lead portfolio manager for the BNY Mellon Natural Resources fund, which has gained 4.8% this year.

Shares of metals producers have outpaced the S&P 500’s 6.5% gain this year. Mining company

Freeport-McMoRan Inc.

has added 11%,

Southern Copper Corp.

has gained 22% in London and

Alcoa Corp.

has climbed 7.1%.

While those shares tend to swing with the boom-and-bust cycles of commodities markets, analysts said mining companies have recently given priority to returning cash to shareholders over investing in new production. Project spending by 10 large mining companies this year and next year is expected to remain well below a 2012 peak, according to figures compiled by

Bank of America Corp.

That could help support prices for both the stocks and the metals. 

On a recent earnings call, Freeport-McMoRan, one of the world’s biggest copper miners, said it would make more capital investment in 2023. Analysts also expect the company to extend its aggressive share buyback program from last year. 

The company is ramping up some operations at existing mines in Indonesia, but says the industry doesn’t have enough investment planned to fill the expected shortages over the long run.

“There’s not enough copper in the world today,” said Freeport Chief Executive

Richard Adkerson.

“There’s a real insufficient amount of copper in relation to significant growing demand.”

U.S. aluminum producer Alcoa said it also expects inventories to remain low this year. 

“The projected stock levels in 2023 could be insufficient if we see a rebound from current demand growth figures in China or the rest of the world,”

Roy Harvey,

president of Alcoa, said during the company’s fourth-quarter earnings call. 

Investors are piling into metal futures, with total net inflows this year hitting a record high, according to J.P. Morgan Commodities Research data through Feb. 3. That is a sharp divergence from the bearish positioning for most of last year. 

Prices for base metals have swung wildly in recent months. Supply shortages from the war in Ukraine, surging energy costs and pandemic reopenings first powered prices to multiyear highs. Then, prices slumped much of the summer, dragged down by worries about lockdowns in China and the prospects of a U.S. recession. 

A weakening U.S. dollar has also helped lift metals. Signs of slowing inflation have spurred bets that the Federal Reserve won’t have to raise rates for much longer. That has dragged the dollar down 10% from its September peak, making it cheaper for foreign investors to buy metals and other commodities, which are priced in the U.S. currency. 

To be sure, questions remain about the outlook for metals demand. The U.S. housing market has weakened, while a recent blockbuster jobs report suggested the Fed might have to hold rates at higher levels for longer than investors thought as the year began. Metals have shed some of their gains recently. 

Despite a potential slowdown in the U.S., some analysts still expect that modest growth in China will continue to lift prices. Fitch Ratings revised its 2023 forecast for China’s gross domestic product—a measure of goods and services produced across the nation—to 5% from 4.1%. 

Chris LaFemina, an equity research analyst at Jefferies, expects copper in London to gain about one-third above its levels of $8,857.50 a metric ton on Friday.

“Even if the U.S. is going into a recession, don’t you want to own copper if China is recovering?” he said.

Write to Hardika Singh at [email protected]