Since the end of June, the price trend of non-ferrous metals has diverged, with the price of copper, lead and zinc showing a significant rebound, while the price of aluminum and nickel has continued the decline since the end of May. We believe that there are two main reasons for the divergence in the price trend of non-ferrous metals: on the one hand, the fundamentals of supply and demand are different, in the case of demand in the seasonal off-season, copper, lead and zinc are facing the problem of tight supply at the mine end or smelting end, while aluminum and nickel have no shortage of mine end for the time being. On the other hand, the financial attributes of copper are stronger, and the price has rebounded from the recent interest rate cut expectations of the Federal Reserve and the "Trump trade".
Looking forward to the future market, we believe that the macro environment is more favorable for non-ferrous metals, but the price fluctuation range also depends on the improvement of the micro supply and demand side. Overseas, the probability of Trump's victory in the US presidential election is high, and his tax cuts, the depreciation of the dollar, re-industrialization, tariffs on imports and economic stimulus plan may increase the pressure of inflation to pick up. The impact of the Federal Reserve rate cut on non-ferrous metals path is not clear at present, if it is a preventive rate cut, it means that the US economy will not have a deep recession, more non-ferrous metals; If it is a recession-style rate cut, and the recovery of domestic demand in the United States is slow, it will be negative for non-ferrous metals.
The United States election more non-ferrous metals
With the rise of Trump's election probability, its policies advocate the overall benefit of non-ferrous metals, especially its large-scale tax cuts and manufacturing reshoring policies have a significant impact on the global supply chain, US inflation and the financial attributes of commodities.
First of all, Trump proposed a large-scale tax cut, the US fiscal overall will maintain the momentum of expansion, and it is likely to increase the disposable income of the private sector, conducive to the recovery of private sector consumption, and have a buffer effect on the slowdown of the US economy. Trump campaigned on sweeping tax cuts and making the regulation permanent, and is considering further lowering the corporate tax rate to 20 percent from the previous 21 percent. If Trump wins the election, his tax cuts are conducive to the replenishment of the US manufacturing industry, and the pulling role of non-ferrous metal consumption will be enhanced.
Second, Trump's campaign platform puts economic issues at the core, and one of the important measures is the dollar depreciation policy. Moreover, even if Trump does not implement the dollar devaluation policy, the ballooning fiscal deficit and huge public debt of the United States are shaking the credibility of the dollar. In history, there is a precedent for the U.S. government-led depreciation of the dollar exchange rate, which led to a surge in the price of precious metals and non-ferrous metals. The most famous example was the "Nixon shock" of 1971. In the 1970s, the US had a worsening budget deficit and a trade deficit. Under pressure, the Nixon administration had two options to remedy the imbalance: tight monetary policy or a weak exchange rate. In order to reduce unemployment, the Nixon administration chose to abandon the Bretton Woods system and let the dollar exchange rate depreciate sharply. On August 15, 1971, the Nixon administration suspended the convertibility of the dollar into gold, imposed a temporary (90-day) 10% surcharge on all dutiable imports, and signed the Smithsonian Agreement at the end of 1971, devaluing the dollar by 7.89% against gold and 10% against major currencies. In this context, the international copper price rose from $1,150 / ton in 1971 to $1,310 / ton in 1973, an increase of 14%.
Finally, the imposition of tariffs may hinder the circulation of the global industrial chain and supply chain, and exacerbate the supply pressure of raw materials and semi-finished products such as non-ferrous metals. In terms of trade policy, both Biden and Trump have adopted trade protectionism and "America first" stance, giving more consideration to US national security and risks in the global supply chain restructuring, rather than only considering efficiency and cost, and have adopted onshore, nearshore and friend-shore methods to restructure the global industrial chain, advocating the decentralization and diversification of supply chains.
The path of impact is unclear
Judging from the recent economic data released by the United States, the momentum of economic growth is becoming more obvious, which means that the Federal Reserve is more likely to cut interest rates in September. Fed Chairman Jerome Powell also recently said that it is not necessary to wait for inflation to fall to 2% before starting to cut interest rates. Historically, if the relationship between unemployment and economic growth in the United States follows Sam's Law, when the 3-month moving average of the unemployment rate rises by 0.5 percentage points or more relative to the lows of the past 12 months, the United States is in the early stages of a recession. Since 1950, if the unemployment rate has triggered Sam's Rule for three consecutive months, the U.S. economy has been in the early stages of a recession, which has been confirmed in 11 recessions defined by the U.S. economic research institute NBER.
Further, the Fed's monetary policy follows Taylor's rule, and empirical research shows that in the rate reduction cycle, the Fed pays more attention to the unemployment rate. It is estimated that if the unemployment rate rebounds to 4.5%, or close to 4.5%, the Federal Reserve will be very likely to start cutting interest rates.
Looking back at the six rate cut cycles of the Fed since 1984, there are both preventive rate cuts and recession rate cuts. Among them, the pre-interest rate cut is beneficial for non-ferrous metals, because the background of the pre-interest rate cut is that the US economy has not yet fallen into recession, the unemployment rate has only slightly recovered, and demand has not collapsed. Examples include December 1984 - August 1986, July 1995 - November 1998, and August 2019 - March 2020. If it is a recessionary rate cut, the US economy is in recession, and if there is no economic growth hedge in other countries such as China, then the impact on non-ferrous metals is bearish. If the United States economic growth decelerates, and the Federal Reserve starts recession-style interest rate cuts, and China's economic growth accelerates, then non-ferrous metals will continue to rise, such as in 2016-2017. We tend to think that if the Federal Reserve starts to cut interest rates in September, then the probability is a preventive rate cut, which will benefit non-ferrous metals.
Global supply chains are uncertain
From the perspective of supply and demand, domestic non-ferrous metal consumption is still weak, and it is in the seasonal off-season, the speed of destocking is slow, and the enthusiasm of downstream procurement is not high. However, from the supply side, copper, lead and zinc are facing greater tightening pressure, especially copper and zinc mining processing fees continue to be depressed, at a historic low, in addition, recycled copper related enterprises are also facing cost upward pressure. In aluminum, supply is expanding, but demand expansion is small, and aluminum ingot destocking is slow. Research data from relevant institutions show that as of July 15, the social inventory of aluminum ingots remained at the level of 735,000 tons, higher than the 479,000 tons in the same period last year, and the operating rate of downstream aluminum processing leading enterprises is only 62.2%. Under the pattern of oversupply, the growth of aluminum exports is an important way to resolve excess pressure, but it is currently facing the risk of overseas tariffs.
To sum up, the overseas macro environment as a whole is more positive for non-ferrous metals, especially Trump's victory is conducive to easing some of the pressure of the US economic slowdown, but the US inflationary pressure will rise, and measures such as tariffs and re-industrialization will lead to global supply chain disruptions.
From the perspective of capturing trading opportunities and hedging risks, foreign investors can use COMEX aluminum futures and domestic investors can use Shanghai Futures Exchange aluminum futures to carry out the reverse operation of "buying far and selling near", and the long-term probability of non-ferrous metals will restart the rally; Purchasing companies can use COMEX copper futures and Shanghai Futures Exchange copper futures, Shanghai International Energy Exchange international copper futures to buy hedging, hedging potential price increases brought about by the risk of rising costs.
