Investing in Commodities? Here are 8 charts to watch.

Morgan Stanley says a strengthening US dollar and rising bond yields are weighing on non-yielding commodities, and incoming macro data will become increasingly important.

“While we have noted that commodity demand and pricing have held up better than macro headlines would suggest, any sign that this is changing could drive downside risks,” analysts including Amy Gower and Walid Hasanzadeh said in a note last week.

As the global metals industry switches focus to the upcoming London Metals Exchange (LME) week this week, where long-term contracts are expected to be discussed, we outline some key charts for resource investors.

A Rough Week

Base metals have struggled against the rising yield backdrop and China's absence amid its Golden Week Holiday.

"As a result, copper witnessed its steepest weekly decline in nearly 11 months, falling 4% on the week, with rising LME inventories also weighing on sentiment," note the analysts.

Base metal prices 12-month chart (Source: Morgan Stanley)

Likewise, precious metals were also under substantial pressure last week, with gold falling to its lowest level since March, down to US$1,820 an ounce.

"The recent higher-for-longer narrative has weighed on investor sentiment, resulting in a significant reduction in gold ETF holdings the past few weeks," the analysts said.

Precious metal prices 12-month chart (Source: Morgan Stanley)

Iron ore prices remained relatively flat around US$115 a tonne amid China's week-long holiday hiatus. There have been reports that China's state-owned buying agency is in negotiations with leading miners such as Rio Tinto over next year's supply. The agency was set up to give China more pricing power.

Bulk commodity prices 12-month chart (Source: Morgan Stanley)

Commodity Thermometer

Morgan Stanley has ranked uranium, platinum, thermal coal and aluminium as the most bullish commodities under its coverage. The Metals & Mining Commodity Thermometer ranks commodities between 1 (bearish) and 5 (bullish). 

Commodities with a ‘5’ rating (Source: Morgan Stanley)

Lithium was the only commodity to receive a 2 or lower ranking.

Commodities with a ‘2-3’ rating (Source: Morgan Stanley)

Copper: A Balanced Market

"China's implied demand for copper and aluminium has been holding up well versus other commodities such as steel, supported by property completions and green drivers. Focus will be on the sustainability of this into year end and 2024," the analysts said.

China's apparent copper consumption has remained relatively buoyant, up 11% year-to-date while supply out of key regions such as Chile and Zambia have disappointed, according to Morgan Stanley.

China's copper price vs. apparent consumption (Source: Morgan Stanley Research)

Nickel: Find a Floor

Nickel prices have dropped around 40% from late 2022 peaks. The analysts says current prices have already undershot their forecasts and moving towards cost support, so the bulk of the move may be done.

That said, key data points to look out for include:

• The pace that new producers obtain approval for LME delivery

• Sustainability of nickel ore's tightness with Indonesia's 2023 quota restrictions

China's apparent nickel consumption vs. LME price (Source: Morgan Stanley Research)

Iron Ore:

Iron ore inventories at China's sea ports are not far off 7-year lows.

Iron ore inventories at China's ports (Source: Morgan Stanley)

But will we see a strong or muted restocking response?

China's steel and commodities consultancy Mysteel:

• "The total volume of iron ore shipped from the 19 ports and 16 mining companies in Australia and Brazil under Mysteel's regular survey to global destinations increased by a large 4.8 million tonnes or 19.5% on week to touch a three-month high of 29.4 million tonnes over September 25-October 1."

• "Most participants in China's iron ore market believe that after enjoying a modest boost from steelmakers' post-holiday restocking, ore prices will fluctuate or even soften in the near term."

• The unlikely rise post-holidays reflects a) the high price of iron ore making steel mills more cautious about buying and b) the deepening losses that more mills are bearing

Commodity Price Outlook

Source: Morgan Stanley