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Base metals hit by Dollar strength and trade tariffs

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Base metals were in a cautious mood this morning after prices slipped over the last few sessions. The strength of the dollar is working against higher prices for copper, aluminium, nickel and zinc as is the tariff tit-for-tat that is going on between China and the US, alongside the slight slowdown in China’s manufacturing.  

The latest US tariffs on $200 billion worth of Chines goods could go into effect as soon as Friday, shortly after the deadline for public comments on the proposed tariffs tomorrow.

They could stymie the growth in the Chinese economy, something base metal producers depend on given that China buys roughly a half of the total global production of copper, aluminium, iron ore and coaling coal.

Although state-compiled economic data indicates that China’s manufacturing is still expanding nicely, data reported by the privately owned Caixin index is showing a different picture – one in which China’s manufacturing is slowing down. This is creating a major headwind for all the base metals.

The London Base Metals Index

On Tuesday, the London Base Metals Index – a basket index which includes six base metals – lost over 2% and fell to a 13-month low. The decline would have been even bigger had it not been for US economic data showing that manufacturing in the US, another major metals buyer, is booming and is at its strongest in over 14 years.

Copper prices dropped the most, down 1% on the day to $5,905 and then continued to decline Wednesday to $5,822.50.

Marex Spectron says that the next resistance level for copper – the level at which prices will struggle to move higher – is at $5,900 and then yesterday’s high of $5,973, adding that prices are little changed this morning and that the turnover remains generally light.

“Base metals generally remain beholden to the dollar and macroeconomic headwinds,”

Of all the base metals, aluminium is now in the strongest position. Prices for the metal climbed higher during July and August to reach their highest level in nine months and although they declined in the last few sessions, their decline is from a higher level than other base metals.

The next support level for aluminium is at $2,042 and then between $2,000 and $2,010, according to Marex Spectron.

Some of the move higher was prompted by the strike at Alcoa’s operations in Western Australia. Workers there are due to vote tomorrow on a proposed deal and the local unions expect that the vote will be against the submitted proposal.

A “no” will prolong the strike which has already lasted for a month and will start affecting the supplies of alumina, the raw material for making aluminium.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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