How Could Rate Cuts Affect Copper and Aluminium Prices?

With the Federal Reserve expected to start rate cuts in the upcoming meeting on September 17-18, investors are increasingly considering how U.S. monetary easing might affect industrial metals, particularly copper and aluminium.

Analysts at HSBC have outlined two potential scenarios that shed light on how prices for these metals could respond under different economic conditions.

In a “soft landing” scenario, where the U.S. economy avoids a recession and the Fed implements modest rate cuts—predicted as three reductions of 25 basis points in 2024 and an additional 75 basis points in 2025—the industrial metals market could mimic trends seen in 2019. In that year, rate cuts were introduced as a mid-cycle adjustment to prevent economic slowdown. As a result, copper and aluminium prices remained largely stable since the market had already anticipated the economic deceleration prior to the reductions.

If this scenario unfolds, it is likely that we would see a similar pattern to 2019. Demand had weakened before the rate cuts, with copper and aluminium prices taking around two months post-first cut to establish a W-shaped bottom before gradually recovering. The muted market response stemmed from the intention behind the rate cuts, which aimed to sustain economic momentum rather than address a crisis, limiting potential price movements for these metals. In this context, while a quick recovery is possible, price changes may stay within a limited range unless there is a substantial increase in demand.

Conversely, if the U.S. economy enters a recession, the Fed is anticipated to enact more aggressive rate cuts. Analysts predict that metal prices would likely mirror those seen during the dot-com bubble from 2000 to 2003, a period marked by significant declines—copper fell by 34% and aluminium by 28% due to weak global demand. Should a recession occur, industrial metal prices could potentially plummet by 20% over the next year, highlighting their vulnerability to prolonged economic challenges. Historical downturns have shown that metal prices often bottom out only after aggressive rate cuts have been fully absorbed by the economy and growth begins to recover.

Despite the challenges posed by potential economic downturns, HSBC favors aluminium within its Metals & Mining coverage. The analysts argue that aluminium might show greater resilience compared to copper in this rate cycle, driven by a combination of supply constraints and robust demand linked to the ongoing energy transition. The tight supply throughout the aluminium value chain, paired with elevated alumina prices, is expected to bolster margins, offering protection to aluminium prices against the fallout from an economic slowdown, especially as governments could increase investments in energy transition initiatives to stimulate growth.

Moreover, structural factors within the aluminium market, such as China’s restrictions on new capacity expansion and limited global production growth, contribute to this resilience. This inflexibility in supply, combined with strong demand applications, positions aluminium favorably as an investment opportunity during this time. Major players like China Hongqiao and Chalco are projected to see significant earnings growth in 2024 due to full capacity utilization and strong margins.

As we analyze previous rate cut cycles, several parallels can inform current expectations. During the soft landing in 1995-1996, copper and aluminium prices experienced moderate declines but bounced back as macroeconomic indicators improved. However, during more severe economic downturns, such as the dot-com bubble and the global financial crisis, metal prices suffered sharper and prolonged declines, facing a slower recovery afterward.

In the recent cycle from 2019 to 2020, initial rate cuts by the Fed served as a mid-cycle adjustment. Prices for copper and aluminium fell by approximately 15% and 12%, respectively, but began to recover prior to the onset of the COVID-19 pandemic. This recovery was driven by renewed manufacturing activity and a weaker U.S. dollar—factors that might again influence the current cycle.

Although historical rate cut cycles offer valuable insights, HSBC’s analysts warn that the relationship between industrial metal prices and monetary easing only captures part of the dynamics at play. The sentiment-driven effects of rate cuts on metal prices do not fully encompass the intricacies of supply and demand. The strain in copper and aluminium supply chains—intensified by underinvestment in new copper projects and capacity limitations in aluminium production—serves as a significant support for prices. Additionally, the rising demand from the energy transition, which tends to be less responsive to macroeconomic fluctuations, is likely to remain steady, particularly with ongoing government expenditures on energy initiatives.