The Hindu Business Line : Metals may probe further lows

Commodity markets continue to plunge to lower and lower levels. Central to the market performance is demand-side concerns that have continued to receive focussed attention. Producers are responding to price declines by cutting output. Also, many new projects have been put on hold or even cancelled because of the current uncertain conditions that pervade the global economy.

The financial turmoil continues to take its toll. There is little sign of it stabilising. Meanwhile global growth prospects have been downgraded; and the world is said to be in recession already with the prospect of it continuing into 2009.

Investors - be they institutions, retail or funds – have increasingly become risk averse and are liquidating their long positions.

No wonder, poor demand environment and exit of speculative capital have meant falling commodity market prices which show no signs of bottoming out. In particular, energy and industrial metals markets seem to probe newer depths.

One can expect producer response in the form of further output cuts.

The key question, therefore, is when will the slide halt and recovery begin?

It is unlikely to happen in a hurry. Lower prices should under normal circumstances help generate demand; but these are not normal times anyway. There is a crisis of confidence that countries and governments are attempting to address. Chinas $600 billion stimulus package is a good example.

Meanwhile it is likely, some more pain is left in the market.

Gold

Prices continue to be impacted by the movements of the dollar.

Despite some pick-up in physical demand, the yellow metal is trading close to one-year lows. In the last one month, it closed in the $700-750 an ounce range.

From a fundamental perspective, notwithstanding investment demand, gold will remain in surplus this year because of a sharp decline in jewellery demand in the first half of 2008.

Experts agree, investment demand will remain the swing factor for prices.

Given the dollar’s current strength and risk aversion among investors, the yellow metal could probe lower levels from here on.

The market can potentially decline by anything between 5 and 10 per cent from the current levels, in the short term.

However, in the medium-term, the dollar has got to begin to weaken. When it would happen is difficult to call at this point of time. But when it does begin to happen, gold is sure to get a big lift, like many other commodities would.

According to technical analysts, gold will see range trading in the short term. The metal is likely stuck in a contracting range between 764 and 701.

In the medium term, one could look for further downside, breaching the psychological 700 level and going towards 680-650 area.

Base metals

Demand deterioration following lowering of global growth expectations remains the central theme of the base metals complex.

The world, already in recession according to the latest assessment, is forecast to witness even lower growth in 2009 (2.2 per cent).

This is having a deleterious effect on base metals market with demand concerns in focus. Prices have declined to multi-year lows. Inventory levels of aluminium, copper, nickel and zinc are rising. Producers have announced output cuts. Zinc, nickel and aluminium have seen the largest cuts.

More may of course be needed to counter the poor sentiment. Chinas $600 billion package to stimulate the economy has not cheered the market.

Importantly, although the current production cuts and deferred or cancelled investments are a way for producers to respond to falling prices, these actions are likely to store and cumulate problems for the future.

These supply side constrictions will have a serious price impact when the process of recovery begins.

Short selling is seen in base metals market which has generated some rallies; but these are unlikely to sustain. Aluminium is expected to trade in a $1,900-2,100 a tonne range, although there still is a downside risk.

Selling into rallies above $2,100/t is advisable. Copper too is likely to see range-bound trading at $3,500-4,000 levels. Nickel is likely to trade sideways as LME stocks are at highest levels since 1999.

Crude

With OECD consumption staying weak and the US stocks at 5-year average, front-end prices are under pressure and are at their lowest since January 2007.

In the short-term, the downward pressure is likely to continue because of weak economic outlook.

OPECs output cut has not had any visible impact on the market. More cuts may be in the offing.

This is likely to lead to tight supplies, and may assist a recovery in oil prices in 2009. It may be safer to position oneself for higher front-end prices sometime in the second quarter of next year.

However, for the present, the balance of risk to the oil price forecast is to the downside.

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