Base Metals and the Fed: How Rate Cut Expectations Are Shaping Commodity Markets

The U.S. Federal Reserve’s pivot toward monetary easing in 2025 has created a seismic shift in base metals markets, with copper, zinc, and nickel exhibiting divergent trajectories. Investors navigating this landscape must balance macroeconomic signals, trade policy risks, and physical market fundamentals to position portfolios effectively.

Copper: A Magnet for Dollar-Weakness and Structural Demand

Copper has emerged as a standout performer, with LME prices surging to $10,015 per metric ton in early September 2025, driven by a confluence of factors. The anticipated September rate cut by the Fed has reduced the opportunity cost of holding non-yielding assets, while a weakening U.S. dollar—reaching a trade-weighted index of 96.9 in June 2025—has boosted demand for dollar-denominated commodities [4]. China’s rebound in infrastructure spending and electric vehicle (EV) production further underpin demand, with refined copper imports rising 12% year-to-date [2].

However, volatility persists. The surprise exclusion of refined copper from U.S. Section 232 tariffs in July 2025 triggered a short-term oversupply as inventories flooded the market, causing a 4% price drop [3]. Investors must monitor geopolitical risks, such as U.S.-China tariff negotiations, which could either stabilize or disrupt copper’s upward momentum.

Zinc: A Tale of Supply Constraints and Uncertain Demand

Zinc markets remain in a fragile equilibrium, with LME prices climbing to $2,865.5 per metric ton in early September amid declining inventories and robust infrastructure demand [4]. However, oversupply risks linger. Mine output and smelter production are rising, while treatment charges—a proxy for supply tightness—have climbed to 15-year highs, signaling potential downward pressure in H2 2025 [1].

The metal’s performance is also tied to Chinese construction activity, which accounts for 40% of global demand. Weak property sector data and delayed Fed rate cuts have dampened investor optimism, with zinc prices expected to remain range-bound unless Chinese stimulus measures accelerate [1].

Nickel: Oversupply and EV-Driven Divergence

Nickel markets face a dual challenge: a global surplus and shifting demand dynamics. SHFE nickel prices hit $15,375 per metric ton in late August 2025, buoyed by EV battery demand and stainless steel production [2]. Yet, structural imbalances persist. Indonesia’s record output—driven by low production costs—has exacerbated a multi-year surplus, with LME inventories remaining 20% above five-year averages [3].

Investor sentiment is further clouded by speculative positioning. While funds have turned net long on nickel, weak end-use demand from stainless steel and battery sectors limits upside potential. A potential U.S. tariff on August 1 could further depress prices, though a September Fed rate cut might temporarily attract speculative flows [3].

Strategic Positioning for Investors

For investors, the key lies in diversification and hedging against macroeconomic uncertainties:
1. Copper as a Core Holding: Prioritize copper for its resilience to dollar weakness and structural demand from decarbonization. However, hedge against trade policy risks by allocating to ETFs with exposure to Chinese infrastructure indices.
2. Zinc’s Tactical Opportunities: Consider short-term long positions in zinc if LME inventories continue to decline, but cap exposure due to oversupply risks.
3. Nickel’s Speculative Edge: Allocate a smaller portion to nickel for speculative gains, focusing on EV-related equities rather than physical commodities to mitigate supply-side volatility.

Conclusion

The Fed’s rate cut expectations have created a fragmented base metals landscape, with copper benefiting from macroeconomic tailwinds while zinc and nickel grapple with supply-side challenges. Investors must adopt a nuanced approach, leveraging dollar weakness and sector-specific demand trends while remaining vigilant to policy-driven headwinds. As the Fed’s September decision looms, strategic positioning in copper and selective exposure to zinc and nickel could yield asymmetric returns in a volatile market.

Source:
[1] Quarterly Metals Outlook Q3 2025 [https://www.sucdenfinancial.com/en/market-insights/metals-outlook/quarterly-metals-report/qmr-q3-2025/]
[2] Demand and interest rates are expected to boost copper by 3% per month [https://energynews.oedigital.com/mineral-resources/2025/08/29/demand-and-interest-rates-are-expected-to-boost-copper-by-3-per-month]
[3] SMM Morning Comment For SHFE Base ... [https://www.metal.com/en/newscontent/103510733]
[4] US Dollar Strength and Its Impact on Copper Prices [https://discoveryalert.com.au/news/us-dollar-strength-impact-copper-prices-2025/]