Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Industrial Metals Are Spiking on Inflation Fears
Transcript
- Lucas: Copper just hit four dollars fifty-one a pound. That's a new record high for this cycle, and it's not alone. Aluminum and zinc are both up more than eight percent in the last month. Luna: I saw that headline — 'inflation fears rippling through industrial metals.' But is that actually what's happening, or is it more about China? Lucas: It's both, and that's what makes this interesting. The ten-year breakeven inflation rate — that's the market's expectation for average inflation over the next decade — it's at two point four four percent. Down a bit from last week, but still elevated. Luna: Right, and when breakevens rise, commodities usually follow. Investors start treating metals as an inflation hedge. Lucas: Exactly. But the trigger this time is genuinely supply-driven on top of that financial flow. China's industrial production came in stronger than expected in April, and their property sector is showing signs of life after all those stimulus measures. That's real physical demand. Luna: So you're saying the demand is real, not just speculation. Lucas: The demand is real for now. But let's look at the supply side. Copper inventories on the London Metal Exchange are at their lowest since 2008. Smelters in China are cutting output because treatment charges — that's the fee they get for processing ore — those charges have gone negative. Luna: Negative? So they're paying to process ore? That's brutal. Lucas: Exactly. It means there's a shortage of concentrate, and smelters are running at a loss. So they're cutting runs, which means less refined copper hitting the market. That's a textbook supply squeeze. Luna: And that's why Freeport-McMoRan, the big copper miner, is up like thirty percent this year. Lucas: Year-to-date, XOM is up, but Freeport is actually up thirty-four percent. It's the purest play. But here's where I get cautious: the speculative positioning in copper futures is extremely crowded. The CFTC data shows hedge funds are net long at levels we haven't seen since 2021. Luna: And 2021 was when the rally peaked, right? Lucas: It was. Copper hit four seventy-three in May 2021, then spent the next two years consolidating. So when positioning gets this extreme, a pullback is more likely. But the structural thesis is intact. Luna: What's the structural thesis in two sentences? Lucas: Electrification. Every electric vehicle uses about four times as much copper as a combustion engine car. Data centers, solar farms, grid upgrades — all copper-intensive. And new mine supply is incredibly hard to bring online. The average mine takes fifteen years from discovery to production. Luna: So even if demand softens in the short term, the long-term demand story is still there. Lucas: That's why mining companies like Rio Tinto and BHP are spending billions on acquisitions right now. They're betting that supply won't keep up. But the immediate catalyst — the thing that lit the fuse this month — was a specific data point. Luna: Which one? Lucas: China's April industrial production grew six point seven percent year-over-year. That beat expectations by almost a full percentage point. And within that, exports of solar panels and EVs surged. Those are copper-intensive products. Luna: So the market's saying: China is still the marginal buyer, and they're buying. Lucas: And they're stockpiling. Chinese imports of copper concentrate hit a record in April. They're bringing it in even before they need it, because they're worried about getting cut off if geopolitical tensions escalate. Luna: That's the Russia-China angle. Putin was just in Beijing, and we're seeing more talk about commodity alliances. Lucas: Exactly. But that's a longer-term theme. For this week, the immediate concern is that the rally in industrial metals is starting to feed into producer prices. If copper stays above four fifty, manufacturers of wire, cable, and electronics are going to pass those costs through. Luna: And that's where inflation becomes a self-fulfilling prophecy. Lucas: Right. You see the ten-year breakeven move higher because commodity prices are rising. Then fund managers buy more commodities to hedge that inflation, which pushes prices higher still. It's a feedback loop. Luna: Is there a point where central banks step in? If breakevens go to two point seven or three percent, does the Fed have to talk about it? Lucas: They already are. The minutes from the last FOMC meeting showed concern about commodity-driven inflation. But the Fed can't directly control copper prices. They can only raise rates, which would strengthen the dollar and maybe cool demand. Luna: But a stronger dollar actually hurts commodities, because they're priced in dollars. So that could be the circuit breaker. Lucas: It could be. The dollar index has been relatively stable this month, around 104. If it breaks above 105, you'd likely see commodity prices pull back. But for now, the momentum is still upward. Luna: What about the other metals — aluminum, zinc — are they following the same playbook? Lucas: Similar, but with different specifics. Aluminum has been boosted by sanctions on Russian metal. The US and UK banned new Russian aluminum imports in April, and that's created a supply gap. Zinc is more about mine closures — several large mines shut down last year due to low prices, and now the market is tight. Luna: So it's not a uniform rally. Each metal has its own story. Lucas: Exactly. Copper is the star because it's the most electrically conductive, and that ties directly to the green energy transition. But the price action in all of them is telling you that the global economy is rebalancing around higher raw material costs. Luna: And that has implications for everything from housing to tech. Lucas: Housing especially. Copper wiring in a new home costs about four thousand dollars. At these prices, that could go to five or six thousand. Builders are already dealing with high lumber prices and labor shortages. This is just another headwind. Luna: Lumber is actually down this quarter, but I take your point. So for the listener who wants to track this, what should they watch? Lucas: Three things. One: the ten-year breakeven inflation rate — if that goes above two point five, expect more commodity buying. Two: Chinese copper imports, which are reported monthly. Three: the dollar index. If it strengthens, that's a lid on prices. Luna: Simple enough. Lucas, thanks for connecting the dots. Lucas: Always. The big question now is whether this rally has legs or whether it's a positioning-driven spike. I think the answer is a bit of both, but the structural trend is your friend here. Luna: We'll be watching those breakevens.