The Hindu Business Line : Economic slowdown rattles demand for base metals

Mumbai, Oct 12 The grim global economic outlook kicked in by the US financial crisis may take a heavy toll on demand for base metals such as aluminium, copper, nickel, lead and zinc.

Central banks rate cuts notwithstanding, base metals prices have plunged to multi-year lows in the last few months.

After impacting the euro-zone, the US financial crisis now seems to be creating havoc in the developing countries.

A slowdown in economic activity is likely to curb the demand for base metals.

Though the short term outlook remains weak, further rate cut by the central banks may stem future fall in base metals.

Markets will look forward to Group of Seven (G7) and Group of 20 countries meeting for a more coordinated approach to tackle the global financial crisis.

Aluminium prices in the London Metal Exchange havemoved below $2,230 a tonne level on expectations of prolonged weakness in demand from US automobile sector, which is the major demand driver for the metal.

Aluminium

US automobile sales fell 1.2 million units to 12.5 million in September, the lowest in the last 14 years.

China, one of the major aluminium producers, has cut production on steep fall in demand. Inventories in LME monitored warehouses surged 0.235 million tonnes to 1.394 million tonnes, since August-end.

On the positive side, aluminium production cost is set to drop significantly with the recent fall in crude prices.

In MCX, the near month October contract has lost about 11 per cent in last one month to Rs 106 a kg and is expected to fall further.

Copper plunged to $4,830 a tonne, its lowest since March 2006. Higher stockpiles, lower cancelled warrants ratio and declining spot premiums indicate weak sentiment for the copper market.

Copper

The metal witnessed heavy sell-off as investors dumped positions to seek refuge in safer havens such as gold, since Lehman Brothers filed for bankruptcy.

Housing starts in US tumbled to a 17-year low of 8.95 lakh and home sales declined 2.2 per cent to 49.10 lakh.

Housing is the sector where most of the copper is used.

Copper market is expected to witness a surplus of about one lakh tonnes in 2008, growing to about 2.75 lakh tonnes in 2009, according to the International Copper Study Group.

The near month November contract has dipped 37 per cent since September to Rs 236 a kg on Friday in MCX and is expected to fall further.

The sharp fall in demand coupled with high inventory has pulled nickel prices to $12,300 a tonne.

Nickel

Inventories are still at the eight-year high levels of about 54,966 tonnes.

Production of stainless steel, one of the major demand drivers for nickel, was down 1.8 per cent in the first half of 2008.

Nickel output may outpace demand by 1.10 lakh tonnes next year, up from a surplus of 30,000 tonnes this year.

Production of China’s high nickel-content stainless steel ‘300 series’ fell to 2.2 million tonnes in first seven months from 2.4 million tonnes last year.

Posco, Asia’s largest stainless steel manufacturer, has decided to cut production 20 per cent or 25,000 tonnes.

Though prices are expected to decline further, a pullback cannot be ruled out as prices are trading below the average production cost of $15,000 a tonne for small producers.

Despite shutdown of one of the three mines of Yuguang Gold & Lead Co, China’s top lead producer, the global lead market was in surplus of 23,000 tonnes in the first seven months of this year against a deficit of 37,000 tonnes in the same period last year.

Lead

Shutdown of the mine reduced supply by about 10,000 tonnes. Lead may follow other metal complex in the downtrend.

Zinc

Zinc has managed to trade in the range of $1430 and $1699 a tonne, resisting a major fall. It was trading with a strong downside bias as increasing stockpiles and weak spot demand weigh down on the metal.

The global zinc market was in surplus of 77,000 tonnes in the first seven months of the year, according to the International Lead and Zinc Study Group.

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