Base metals lose momentum amid strong dollar and demand concerns

Base metal prices have corrected sharply in recent months after a strong rally during the first half of the year. On MCX, copper has declined from around ₹1,432 per kg to below ₹1,315, while aluminium has fallen from ₹397 to ₹326. Zinc has also retreated from its August peak of ₹452 to around ₹403. The pullback has been driven by a combination of factors including a stronger US dollar, uneven demand recovery in China, rising crude oil prices, and concerns over global economic growth. While the long-term outlook remains supported by electrification, renewable energy investments, and infrastructure spending, investors are currently focused on short-term economic headwinds and the ability of demand growth to absorb expanding metal supplies.

Strong US Dollar Pressures Metal Prices

One of the key reasons behind the weakness in base metals is the strength of the US dollar. The Dollar Index (DXY) has climbed to the 103-104 range, supported by resilient US economic data, elevated Treasury yields, and expectations that the Federal Reserve may keep interest rates relatively restrictive for longer.

Since most commodities are priced in US dollars, a stronger greenback makes metals more expensive for buyers using other currencies, reducing global consumption and investment demand. It also encourages speculative funds to shift away from commodities. Historically, metals such as copper, aluminium, zinc, and lead have maintained an inverse relationship with the dollar. As a result, the recent appreciation of the US currency has been a major contributor to the correction across metal markets. Unless the dollar weakens meaningfully, metals may struggle to regain strong upward momentum in the near term.

China Recovery Remains Uneven

China accounts for nearly half of global consumption of major industrial metals, making its economic performance critical to price trends. Although Beijing has introduced supportive measures through infrastructure spending, manufacturing incentives, and monetary easing, the recovery remains uneven.

The property sector, traditionally a major consumer of metals, continues to face challenges amid weak housing activity and subdued real estate investment. This has constrained demand for products such as copper wiring, aluminium components, and galvanized steel.

At the same time, infrastructure projects, renewable energy installations, power-grid expansion, and electric vehicle manufacturing continue to support metal consumption. Copper demand remains strong due to electrification and clean-energy projects, while zinc demand benefits from its extensive use in galvanized steel. However, market participants remain concerned that growth in these sectors may not fully offset weakness in housing and export-oriented industries. Investors are therefore seeking stronger evidence of sustained industrial growth before rebuilding bullish positions.

Rising Crude Oil and Growth Concerns

Higher crude oil prices have also influenced the outlook for industrial metals. Rising energy costs increase expenses across the mining, smelting, refining, and transportation chain. Aluminium and zinc, in particular, are highly sensitive to power costs.

While higher costs can sometimes support commodity prices by limiting production, markets are currently more concerned about the impact on economic growth. Expensive energy can reduce business activity, industrial production, and consumer spending, ultimately weakening demand for metals used in construction, machinery, infrastructure, and automobiles.

Consequently, investors fear that slower global growth may outweigh the potential support from higher production costs if energy prices remain elevated for an extended period.

Supply-Demand Balance More Comfortable

Fundamentally, the supply-demand picture has become more balanced compared to the tight conditions experienced in recent years. Copper continues to benefit from long-term demand linked to electrification, though new mining projects and improving production have eased immediate shortages. Aluminium supply remains healthy, especially from China, while zinc availability has improved due to better concentrate supply and increased smelter output.

Lead fundamentals also remain broadly balanced, supported by stable battery demand. Exchange inventories have risen modestly from extremely low levels, reducing concerns over acute shortages.

However, supply growth is not excessive. Environmental regulations, declining ore grades, and rising capital costs continue to create structural constraints across several metals. As a result, markets are neither facing a severe deficit nor a substantial surplus, leaving prices largely driven by macroeconomic developments.

Outlook: Positive Long-Term, Volatile Short-Term

Despite the recent correction, the medium-term outlook for base metals remains constructive. Demand from renewable energy, electric vehicles, battery storage, power transmission networks, and urbanization continues to provide strong structural support.

However, prices may remain volatile over the coming months as markets monitor Federal Reserve policy, movements in the US dollar, China's economic recovery, and energy prices. Copper is expected to remain the strongest performer due to its crucial role in electrification and the global energy transition. Aluminium and zinc should also benefit from infrastructure and manufacturing growth, though gains may be more gradual.

Overall, base metals appear to be entering a consolidation phase after a strong rally. While near-term challenges persist, the broader long-term story remains supportive, suggesting the recent correction may represent a pause rather than the end of the structural uptrend.

(The author is Head of Commodity Research, Geojit Investments)