(Bloomberg) -- Copper, zinc and nickel fell as industrial metals reversed some of the gains that were driven by optimism the Federal Reserve was moving closer to cutting rates.

LME copper futures traded at their highest in almost four months Friday after comments by Fed Chair Jerome Powell were interpreted as increasing the chances of monetary policy easing early next year. High interest rates have been a major headwind for industrial materials.

“Everyone is talking about rate cuts so it’s difficult to short base metals. If rates are cut, the cost of carry will drop, companies can build up stocks again which means less in the market,” said Tiberius Group AG portfolio manager Jo Harmendjian.

But risk assets, including industrial commodities, began this week on a more cautious note as investors reassessed the timing of any dovish Fed move, and weighed the likely strength of the global economy outside of China next year. 

Demand for metals could weaken further as the effects of tight credit conditions work their way through major economies, Citigroup Inc. said in a note by analysts, including Max Layton and Wenyu Yao. The impact of Chinese policy stimulus is unlikely to completely offset the drag from developed markets in 2024, they said.

Copper fell 1.9% to $8,448 a ton on the London Metal Exchange as of 5:08 p.m. local time after closing Friday at its highest in nearly four months. Nickel was down 2.1%, while zinc dropped 2.4%. 

Metals have had a mixed year in 2023 with copper gaining support from strong Chinese demand, especially from the renewable energy industry. Nickel has plunged around 45% amid a wave of new Indonesian production.

Physical Tightness

There are emerging signs of tighter supply conditions in the global copper market, with a key indicator of raw material availability — treatment charges paid by smelters — continuing to fall.

Spot fees paid by Chinese smelters have fallen below $70 a ton for the first time since August 2022, Fastmarkets data show. Last week, several Chinese smelters agreed to a 9% drop for annual contracts after previously resisting a decrease of that scale.

Meanwhile spot premiums for copper cathodes in Shanghai are trading over $110 per ton according to daily data from data provider SMM, down slightly from their highest levels in more than a year. 

The closing of the $10 billion Cobre Panama mine — after widespread political protests in the Central American nation — leaves world copper smelters with less raw material than expected to support their rapid expansion in capacity.

--With assistance from Joe Deaux.

©2023 Bloomberg L.P.