Is Fear a Driving Force as Commodity Prices Continue to Slide?

Here’s a short poem:

Inflation. Recession.
Is this what’s leading to financial fear and depression?

Investors continue to be quite twitchy in the markets at the moment, and their concerns and uncertainty can be understandable. Even though the Federal Reserve is confident where recession is concerned, there seems to be a fight and a flex between inflation and recession with the ECB. They’re struggling to decide whether to fight inflation or fight recession, and with that uncertainty comes a factor of not-knowing for investors. In turn, that creates fear in the market.

“Global recession fears have dampened the demand outlook for commodities,” Misch Schneider commented for CMC Markets. “Yet the biggest factor in the recent commodity price slide is not necessarily the real cost, but rather the fear that the Federal Reserve, convinced the US economy is strong, will continue to raise interest rates.”

Which way for copper?

There’s been a decline in expenditure, and that can be highly attributable to non-essential goods. You can add the rise in household expenses such as the cost of food, energy and housing to that too. And then, there’s copper.

“Copper has many uses including home appliances, power generation and cars. Of special note is its use in electric vehicles (EVs).” Misch Schneider pointed out for CMC Markets.

The element is one of the key metals to build the infrastructure for delivering renewables and low-carbon energy. Recently, estimates have shown that 1.1-1.2kg of copper are consumed for every kilowatt hour of lithium-ion battery use.

And the IDTechEx has forecasted that by 2027, 600 kilotonnes of additional copper will be needed to match this demand.

So, surely this points hope in the direction that the price of copper could be about to rise? With the materials importance role in EV production, Goldman Sachs thinks it could more than double in price from current levels. We already knew in June that inflation had not peaked and the worst was still to come. However, prices for copper futures peaked in late March. Since then they have fallen from $10,230 per tonne to $8,035 per tonne – an incredible decline of 32%.

Also, it isn’t easy to increase the production of copper, with an upfront cost and a significant lead time in getting new mines online.

Stress and fear

Families are stressed by rising food and gas prices, and there’s been no hard evidence that Fed actions are beginning to halt what is now the fastest inflation surge in 40 years. Many people see that as a significant risk. And that elevated inflation could become entrenched if the public began to question the resolve of the Federal Open Market Committee to adjust their stance of policy.

Misch Schneider said: “As prices rise for petrol, groceries, new homes and travel, the copper futures market tells a different story. Recent personal consumption expenditures (PCE) numbers show declines in auto sales, particularly used cars and other durable goods.”

So, which way are we going? It’s a question that either has no answer, or at the moment has too many answers. And, because we haven’t been handed a definitive, people from all walks of life – investors included – are wary.