The Hindu Business Line : Dollar’s rally fuels fall in base metals

Mumbai, Aug 17 The metals market was the focus of attention last week. Among base metals, nickel rallied 3.3 per cent over the past week, lead fell by an astounding 14.8 per cent, while most others ended the week unchanged. Currency factor played a key role in the price action.

On Friday, in particular, the main falls occurred across the precious metals space, with silver down by 13.7 per cent to $12.82 an ounce and platinum dropping 7.4 per cent to $1,400/oz, their lowest levels since late 2007. Spot gold dropped 3.9 per cent to close at $786.50/oz versus previous day’s close of $818/oz.

sharp appreciation

Latest data from International Nickel Study Group (INSG) showed the global nickel market moving further into surplus in June. The group reported refined nickel production of 117,000 tonnes in June versus consumption of 109,000 tonnes. For the first half of 2008, INSG reported production of 719,100 tonnes and consumption of 683,300 tonnes, generating a surplus of 35,800 tonnes.

The price falls in base metals was driven essentially by the rally in the US dollar. The recent sharp appreciation in the US dollar against the euro, a variable that is notoriously hard to predict, has been a major factor contributing to the sell-off in base metals prices since mid-July, commented Macquarie Research Commodities. The US dollar has gained about 7.5 per cent from almost 1.59 to one euro in mid-July to 1.47 to one euro as at Friday last. Over this period, the LMEX metals index fell from 3990 to 3490 (decline of 12.6 percent).

Since 2002, the boom across the metals complex (the four-fold increase in metals prices) has been underpinned by a 40 per cent depreciation of the US dollar, analysts pointed out adding that all other things being equal, a stronger US dollar will have a negative impact on commodity prices.

From a fundamental perspective, a stronger dollar will lower the US dollar-denominated cost curve and will also make commodities more expensive in non-dollar terms, deterring buying, Macquarie explained.

From a more speculative perspective, a stronger dollar removes one of the catalysts for investors to buy dollar-denominated commodities. So, investors need to watch out dollar movements. Where would the dollar be over the next several months? Some currency experts see a steadily firming greenback, although volatile. There is the possibility that the dollar will trend higher against the euro, with the appreciation accelerating from mid-2009.

By the end of 2008, dollar is forecast at Euro/$1.51 and by the end of 2009 at 1.28.

Interestingly, the rally in dollar is happening just at the time when leading indicators point to a slowdown in global economic growth especially in the industrialised countries, a development negative for consumption of base metals in general.