The Hindu Business Line : Fundamentals favour upside for metals

Has the proverbial bubble burst? There were several reasons for the market to go up - low stocks, rising consumption, demand-supply mismatch, rising production costs and so on. If these factors were real, why did the market witness a steep correction?

Non-fundamental factors

Volatility is in the very nature of the commodity market. In addition to fundamental demand-supply factors, non-fundamental factors such as speculative funds too play a role in impacting prices.

Looking at from a historical perspective, especially the rapidity with which the market escalated in recent years, the fall in base metals prices was not so severe after all. Let's see how.

Mid-May when prices fell 10-14 per cent a lot of concern was triggered.

Star performers

Yet, it must be remembered that since the beginning of the year, copper and zinc have been star performers. While copper price increased by 75 per cent, zinc moved even more at over 80 per cent.

Nickel, too, was not far behind at a little less than 60 per cent.

Less impressive was the performance of aluminium and tin both of which increased by around 20 per cent. In comparison, lead performed rather poorly with only 2 per cent price rise last five months. Look, however, at the price performance of various base metals over last five years.

In most cases prices hit their lows sometime late 2001. Since then, the spurt has been phenomenal.

Copper is up by over 500 per cent; nickel up by nearly 400 per cent; and zinc by some 376 per cent. Even the recent under-performers aluminium and tin have more than doubled from their 2001 lows.

Insignificant dip

It is against these gains that the recent price fall should be viewed; in which case the decline looks insignificant.

Notwithstanding recent corrections, analysts assert, the demand-supply fundamentals for base metals are constructive and loaded in favour of an upside to the market.

The strong positive correlation between global economic growth and base metals consumption demand, role of funds, production disruptions, under-investment in new production facilities as also time-lag between investment and actual production combine to infuse excitement into the metals market.