Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Industrial Metals Are Plunging Despite Supply Cuts
Transcript
- Lucas: So copper is down another two-point-three percent this week, and silver just got hammered — down seven percent in five days to sixty-eight dollars and change. That's not a small wobble. Luna: And this is happening while major producers are actually cutting supply. Freeport-McMoRan announced output reductions last month. Glencore idled a copper mine in the DRC. You'd think less supply would support prices. Lucas: You would. And for the first half of 2025, that logic held. Copper was flirting with five bucks a pound on the back of green energy optimism and actual physical tightness. But something broke in the second half, and we've been sliding ever since. Luna: What broke? Lucas: China. Their manufacturing PMI has been below fifty for four straight months — that's contraction territory. And China consumes about fifty-five percent of the world's copper. When their factory output stalls, it doesn't matter if Glencore closes a mine in the Congo. Luna: Right, because the demand drop is bigger than the supply cut. That's the classic commodity math. But I remember in 2023 everyone was talking about a structural copper deficit that would last a decade. Lucas: Goldman Sachs had a famous call — they said copper was the new oil, that we'd see ten thousand dollar a ton prices by 2025. It hit nine thousand in early '24 and then just… stalled. The market priced in too much green demand too fast. Luna: But the green transition is still happening. Solar, wind, EVs — those all need copper. Are we saying those aren't moving the needle? Lucas: They are, but not fast enough to offset the cyclical downturn in traditional construction and manufacturing. Look at China's property sector — still in the toilet. That's a massive copper consumer. And the EV adoption rate in China is actually plateauing around forty percent of new car sales. It's not accelerating anymore. Luna: So the narrative flipped from 'permanent structural deficit' to 'temporary cyclical oversupply'. Lucas: Exactly. And the futures curve reflects that. Copper is in backwardation — near-term contracts are cheaper than longer-dated ones. That tells you the market sees immediate demand as weak but expects a recovery later. It's the opposite of what you'd see if the deficit were here right now. Luna: Silver is even worse. Down seven percent in a week, and it's not just industrial demand — silver has a monetary premium too, but gold is only off one-point-eight percent. What's driving the divergence? Lucas: Silver is half industrial metal, half precious metal. And the industrial half is dragging it down. Plus, silver's supply is actually increasing — global mine output rose about three percent last year. So you've got weak industrial demand and growing supply. Gold, by contrast, has central bank buying as a floor. Luna: And aluminum? That one's interesting because the tariff story should be supportive. The US imposed a two-hundred-percent tariff on Russian aluminum in 2024, and more recently extended tariffs to other countries. Lucas: It did help initially — aluminum prices spiked in late '24. But the market adjusted. Smelters in Canada and the Middle East ramped up production. And global aluminum demand is also tied to China's property and auto sectors. So tariffs reshaped trade flows without creating a lasting price floor. Luna: It's almost like supply-side fixes can't overcome a demand-side problem. No matter how many mines close or tariffs are imposed, if the biggest buyer is slowing, prices go down. Lucas: That's the lesson. And it's why the metals supercycle thesis has taken a hit. The thesis rests on the idea that green investment creates permanent new demand. But that demand is gradual, and it's competing with cyclical headwinds from China's property collapse and global manufacturing weakness. Luna: So what would change the picture? A China stimulus package? A Fed rate cut that boosts industrial activity? Lucas: Both would help. China has been reluctant to do a big stimulus — they're worried about debt and property bubbles. But if PMI stays below fifty, they might have to. And the Fed — well, the market is pricing in a cut in September. If that happens, it could lift industrial metals by lowering the cost of carrying inventory and boosting business confidence. Luna: But timing matters. If the cut comes too late, or if China doesn't act, copper could test five dollars. Lucas: It could. And that's what makes this moment interesting. The supply cuts are real. The long-term demand story is real. But in the short term, the market is saying 'show me the demand.' And until China shows up, metals are going to struggle. Luna: Speaking of showing up — if walking through the economy with us has made something click, there's a simple way to keep this show ad-free and independent. Just buying us a coffee helps a lot. Lucas: Yeah, it's at buy me a coffee dot com slash fexingo. No pressure, but it's what lets us keep digging into these topics without any sponsor constraints. Luna: Exactly. And speaking of digging — we talked about China and the Fed, but there's another factor we haven't touched: inventories. LME copper warehouses have been building since March. Lucas: Good catch. LME copper stocks are up about forty percent from the February low. That's a visible sign that physical demand isn't absorbing supply. It's not just a futures market phenomenon — actual metal is piling up. Luna: So the backwardation we mentioned earlier — that's partly financial, but the inventory build confirms it's real. Lucas: Right. And it's concentrated in Asian warehouses, which points back to China. So the story is consistent: China's slowdown is the dominant force. Until that changes, we're in a wait and see pattern for industrial metals. Luna: How are you positioning your own thinking? Are you bearish near term or are you trying to buy the dip? Lucas: I think the dip could get deeper before it gets better. But I'm watching Chinese credit data and PMI like a hawk. The moment those turn, copper could reverse fast. Commodities always overshoot on both sides. Luna: Fair. And for now, the data says wait. Lucas: It does. But that's what makes this show interesting — we get to track it in real time.