The Hindu Business Line : OECD indicators positive for metals

Output constraints, low inventory levels and rising production costs on the one hand, and continued strong demand growth prospects on the other are seen to be supportive to base metals.

Mumbai , June 18

For the beleaguered base metals market hit hard by the recent sell-off, the latest OECD lead indicators might provide some solace and hope, even though market correction continues over a cocktail of concerns on inflationary pressures, interest rates and slowing economic growth.

The statistics show that most of the major developed economies are set to be cruising ahead in the remainder of the year as industrial production is expected to remain strong well into the fourth quarter.

While the US would be an exception, Japanese and German economies are set to accelerate further, picking up some of the slack in the US.

HISTORIC CORRELATION

Historically, there has been a strong correlation between commodities demand in general and metals demand in particular, and OECD lead indicators.

Experts see the recent meltdown as disappearance of speculative froth.

The demand-supply fundamentals are still generally favourable for the base metals complex. Output constraints, low inventory levels and rising production costs on the one hand, and continued strong demand growth prospects on the other are seen to be supportive to base metals.

It is in this background that the case for a continued tight market for most base metals seems increasingly certain. Demand in developed countries should be well supported in 2007.

Against the backdrop of a strong OECD lead indicator, there have been no significant changes in the macro-economic environment of western economies.

CURRENT SELL-OFF

With China set to remain strong, the current market sell-off is hardly fundamentally driven.

Copper: Despite a strong rise on Friday last, the star performer of the base metals complex, copper is expected to continue to witness nervous conditions and volatile price action in the near term.

Market participants continue to focus on inflationary fears, monetary policy tightening and risks to growth.

"The market will be closely watching the progress of strikes affecting Mexican output after Grupo Mexico said (Thursday last) that it may be able to resolve the situation through talks aided by government mediators", observed a commentator adding that with Chile's Escondida copper mine voting on a package of contract demands on Sunday, this remains a market that few will want to be short in".

Meanwhile, copper stocks in warehouses are rising. Shanghai registered a hefty 10,800 tonnes increase last week to 62,300 tonnes. Singapore too reported some inflows.