- Prices of copper and other industrial metals on the London Metal Exchange (LME) rebounded after weeks of lows, driven by a drop in oil prices and optimistic expectations that the US and Iran might reach a peace agreement over the weekend and resume shipping through the Strait of Hormuz.
- Although Trump indicated that an agreement might be signed as early as this weekend, Iran emphasized that no final decision has been made. The geopolitical risk premium significantly narrowed as the market reassessed supply disruptions.
- Persistently high inflation and expectations that the Federal Reserve might maintain high interest rates for longer continue to constrain long-term demand for industrial metals. Changes in the spot premium over the three-month period indicate that speculative long positions are in the process of closing.
Signs of Easing Geopolitical Tensions Stabilize and Lift Copper Prices
The benchmark three-month copper contract price on the London Metal Exchange (LME) rebounded by 1.44%, reaching $13,676 per ton. Meanwhile, the main copper contract on the Shanghai Futures Exchange (SHFE) also rose by 1.21%, reaching 104,660 yuan per ton. After severe conflicts erupted following a ceasefire agreement between the US and Iran in April, copper prices on major global commodity exchanges fell to multi-week lows on Thursday. As the market responded positively to Trump's comments about a possible peace agreement over the weekend, the downward pressure on copper prices, a barometer of global economic health, was significantly alleviated in the short term. If shipping through the Strait of Hormuz can resume smoothly, risk appetite in the commodity market may further improve.
Significant Narrowing of Spot Premium Indicates Fading Risk Premium
As the market reassessed the duration and extent of supply chain disruptions, the extreme geopolitical risk premium showed a significant decline. Rupankar RM, Head of Market Research and Data Intelligence at AL Circle, stated that the substantial narrowing of the LME spot premium over the three-month period directly highlights the unwinding of speculative long positions amid extreme geopolitical risk premiums. Against the backdrop of reduced concerns about supply security, previous risk-averse sentiment has transformed into a rational valuation adjustment. If the final outcome of the Middle East situation falls short of expectations, the forces of bulls and bears in the commodity market may face a new round of reshuffling, and fluctuations in the spot premium will continue to reflect the interplay between physical supply and demand and macroeconomic expectations.
Broad Rebound in Base Metals but Demand Outlook Still Constrained by High Interest Rates
Driven by rising copper prices, prices of other industrial metals in the London and Shanghai markets generally stabilized. Aluminum, zinc, nickel, and tin all recorded varying degrees of gains, with Shanghai tin rising by more than 2%. However, persistently high global inflation data continues to worry investors, and the market generally expects that central banks in major economies may keep interest rates high for a longer period. A high-interest-rate environment typically weakens the demand outlook for industrial metals that rely on economic growth, making this round of base metal rebound still under macroeconomic pressure. If core inflation pressures cannot be effectively alleviated, the long-term demand growth in the metal market may face reevaluation.
Decline in Energy Prices and Multiple Macro Variables
The decline in global crude oil prices has reduced the costs of industrial manufacturing and logistics, alleviating cost pressures in the commodity market to some extent, which is another key macro factor contributing to the rebound in industrial metals. The current pricing logic of commodities like copper and aluminum is intertwined with geopolitical developments, changes in energy costs, and the monetary policy direction of major central banks. If the US-Iran peace agreement fails to be signed as scheduled, volatility in the oil and metal markets may surge again. Conversely, if the agreement is successfully reached, the market focus is expected to quickly shift back to the fundamentals of the global economy and the impact of high interest rates on real economic demand.
