Copper extends losing streak as US inflation accelerates

Copper prices declined for the third straight day on Thursday as surprisingly high US inflation raised concerns about ongoing Federal Reserve interest rate hikes, prompting selling in industrial metals. This followed a report on Wednesday showing inflation surging in September, heightening worries that borrowing costs could stay elevated.

A stronger US dollar and rising Treasury yields added to the pressure on commodities priced in American currency. Copper traded near $14,333 per tonne, down about 1.1%, as investors reconsidered monetary policy expectations. Other base metals also faced similar pressure, though the extent varied based on supply and demand factors.

The US Bureau of Labor Statistics stated consumer prices rose 0.6% in September, up from 0.4% in August. Annual inflation jumped to 3.7% from 3.4%, exceeding forecasts and complicating the Fed's attempts to curb price increases. Underlying inflation also rose, with the consumer price index excluding food and energy increasing 0.3% in September, bringing its annual rise to 2.6%, compared to 2.4% in August.

The data prompted traders to boost bets on additional rate hikes, reversing some belief that policymakers might keep rates steady. Market pricing suggested the likelihood of an October rate increase had surged after the inflation data, although views remained split on whether the Fed would act sooner or wait until December. Higher US interest rates typically strengthen the dollar and boost financing costs, making dollar-denominated commodities pricier for non-dollar buyers.

They can also dampen industrial demand by limiting investment, construction activity, and manufacturing growth. The resulting strain was especially pronounced for copper, which is extensively used in electrical equipment, power grids, buildings, and industrial machinery. Its vulnerability to global economic conditions makes it susceptible when investors foresee tighter financial conditions.

Wednesday's inflation figures also unsettled other financial markets. Treasury yields rose initially as investors updated expectations for future rates, while stocks fell due to concerns over borrowing costs and company profitability. Energy prices were a major driver of the inflation surge, with gasoline prices jumping 9.1% in September, accounting for more than half of the monthly rise in the headline consumer price index.

The overall energy index climbed 5.2%, while shelter costs rose 0.4%. Food prices remained flat, due to a slight drop in grocery prices combined with higher restaurant expenses. Higher energy costs have also complicated the outlook for industrial metals by boosting expenses for mining, processing, transportation, and manufacturing.

These pressures can squeeze production margins even as monetary tightening threatens consumption. The Federal Reserve's latest survey of regional economic conditions revealed businesses were dealing with growing price pressures, particularly from fuel and transportation expenses. Companies reported difficulties passing higher costs to customers without hurting demand.

The survey also indicated that employment conditions were relatively stable, although some firms were curbing hiring instead of making significant layoffs. For copper traders, developments in China introduced additional uncertainty. Rising inventories and sluggish downstream buying following a holiday period raised doubts about immediate demand strength.

China is the biggest consumer of refined copper, so changes in its manufacturing activity, electricity investment, and property-related demand are crucial for international prices. Inventory fluctuations can impact short-term market sentiment as rising warehouse stocks suggest supplies may exceed immediate consumption needs. However, copper's underlying supply situation remains vulnerable to operational disruptions.

Labor issues affecting mining operations in Chile are still a concern, casting doubt on whether production will continue smoothly. Chile is the world's biggest copper producer, and problems at major mines can affect concentrate availability and refining processes outside the country. The mix of monetary pressure and supply uncertainty has generated conflicting forces on prices.

Expectations of weaker demand have fueled selling, while potential production constraints have offered some support against deeper drops. Market participants are also evaluating whether high copper prices have deterred purchases by manufacturers, especially when companies could delay orders or use up existing inventories. Upcoming US economic data, including producer prices and retail sales, will offer more insight into inflationary pressures and consumer spending.

The Federal Reserve's next policy decision is set for later in October, with officials balancing persistent inflation against the impact of previous tightening on economic activity and employment.