Nickel and copper prices plummeted in 2022 amid economic gloom and mounting recessionary fears, despite supply tightness and low stockpiles.

Prices for copper dropped nearly 20% in recent months to $8,397.00 per tonne on June 23 from an April high of $10,451.75/t. Meanwhile, prices for nickel fell nearly 30% to $23,993.50/t on June 23 from $33,875.00/t on April 21.

The drop in base metal prices points to a reversal in market sentiment from bullish demand expectations as economies recovered from the worst impacts of the pandemic. Buyers appear to be worried about a sluggish rebound in China and recession in majors economies like the U.S. amid surging inflation and interest rates.

"The market's still physically constrained at the moment, but it's all about ... expectations and risk aversion over what might be coming in the next six months or so. And that's really what's weighing so much on metal prices," said Tom Mulqueen, head of research at London-headquartered Amalgamated Metal Trading Ltd., a metal derivatives broker and dealer.

More pessimistic economic outlooks have pushed forecasters to lower metal price and demand growth projections. S&P Global Commodity Insights analysts recently lowered their 2022 copper price forecast to $9,487/t after downgrading consumption growth estimates for countries including the U.S., Germany and Italy. The analysts noted that while "critically low" copper stocks have supported prices, economic headwinds drove their decision to revise this year's copper price forecast.

One key concern in the copper market is that demand for copper-intensive products could decline on the back of central bank efforts to contain inflation through rate hikes. Commodity Insights forecast a small, 56,000-tonne copper surplus this year in a nearly 27-million-tonne market.

"Our macro view is that if central banks keep tightening to reduce inflation, they will be aiming to reduce demand for consumer goods that are likely to contain copper," said Credit Suisse analyst Matthew Hope in a June 24 note. "So whether or not there is a technical recession, base metal consumption should fall."

Meanwhile, fears that China's tough COVID-19 restrictions could drag on its economic recovery loom over the market. J.P. Morgan analysts noted in a June 24 report that its clients are increasingly pessimistic over Chinese growth.

While Chinese stimulus could stabilize and fuel economic recovery in the near term, the J.P. Morgan analysts said "there is a lot of skepticism that Chinese demand will rebound quickly or significantly enough to offset slowing demand in the rest of the world."

And though supply is tight and copper inventories at major warehouses are near multiyear lows, Mulqueen said fears over deteriorating economic growth have trumped otherwise strong-looking market fundamentals. "There's a lot of forward-looking expectation about what might happen in the physical market if conditions there weaken," Mulqueen said.

Analysts also point to the uncertain impact of mine disruptions on 2022 copper supply. "Copper miners had an underwhelming [first quarter] and many revised down their guidance from the start of the year," Credit Suisse's Hope said. "On top of general disruption and operational issue, there were some major disruptions in Peru from social unrest, especially for Las Bambas and Cuajone."

Broader signs of economic stress such as high inventories at retail stores and workforce reductions may be playing into copper market pessimism, Mulqueen said.

"As soon as people get into the mindset that the economy is going to slow and they start positioning for it, eventually that's going to reverberate up the supply chain back to metals demand," Mulqueen said. "That's the risk."

Should central bank tightening continue, Hope expects copper prices to continue dropping from levels that are still, historically speaking, relatively high.

"The copper price remains near China super-cycle highs, while China's copper demand growth is likely to be zero this year," Hope said.