The Hindu Business Line : Base metals weighed down by supply, production concerns

China effect
The effect of the Chinese earthquake on the base metals market is still being assessed.
There is consensus among analysts that even the reduced level of growth in China is strong enough to drive double-digit growth in metals demand.

G. Chandrashekhar

Mumbai, May 20 Two developments are currently on top of base metals market concerns. While supply concerns have emerged in the wake of earthquake in China’s Sichuan province, the latest OECD leading indicators (for March) point to a worsening outlook for industrial production in the developed world.

The US lead indicator was particularly weak, with the six-month rate of change declining sharply.

The indicator suggests that the industrial portion of the US economy is going to get worse, yet before it gets better, according to an expert.

Base metals are particularly hit with producers blaming declining demand from North American building and construction and automotive industries as also de-stocking within certain European industries.

Silver lining

The silver lining is provided by China. The lead indicator for the country has reversed direction and picked up over last two months. Chinese industrial production growth has been slowing.

It declined from a peak of 19.4 per cent year-on-year in June 2007 to 15.7 per cent in April 2008. However, there is consensus among analysts that even the reduced level of growth is strong enough to drive double-digit growth in Chinese metals demand. The effect of the Chinese earthquake on the base metals market is still being assessed.

There are reports of stoppage of production; but there is strong belief that such stoppage would be temporary in order to comply with government’s safety regulations. A greater risk to metals supply would be power shortage and logistics problems, experts assert. Transport restrictions could force facilities to utilise existing stocks.

Production capacity

The drawn down raw material would have to be replenished sooner or later, without which production may have to be curtailed. So, the extent of infrastructure damage and response time to repair would impact the market. Aluminium and zinc may be at some risk. In case of zinc, the production capacity (smelting) affected is about 3 lakh tonnes per annum.

The estimated production loss could be in the range of 20,000-30,000 tonnes or maximum 10 per cent of the capacity affected, but merely 1 per cent of Chinese output as a whole.

Operations may be suspended for up to two weeks, it is believed. However, in 2008, the zinc market is expected to be in surplus. So, this loss is unlikely to affect the market for long.

While zinc stocks with LME have risen, demand in Europe and the US is weak. So, zinc prices, that have risen on the news, would come under pressure before long. In case of aluminium, of the potential affected capacity of 7,30,000 tonnes per annum, but the estimated production loss could be minimal.

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