Base metals rally to peter out as supplies improve

The rally in base metals prices we saw last month has generated unrealistic optimism about the future trajectory of the market. The market currently appears overextended in the wake of not only supply constraints and demand robustness, but also because of huge financial investor interest generated by vaccine availability.

A closer look would tell us that the rally may not last long. As we move closer to the second half of the year, supply constraints are expected to ease, while demand growth may remain somewhat muted.

Economic activity in China, the mover and shaker of the world metals market, is expected to decelerate. Early signs of manufacturing activities in the Asian major slowing back are already visible.

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Copper has been a notable beneficiary of the recent rally in the base metals complex. Prices have breached $9,000 a tonne and are back at levels seen ten years ago in 2011. Supply tightness caused by disruption to mine operations in Latin America helped the market move up in the last two months; but supplies are now beginning to pick up.

On March 3, copper was quoted at $9,266. The metal is likely to trade at an average price of $8,500 in the second quarter and 10 per cent lower in H2 this year.

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The relationship between stainless steel and nickel is well-recognised. Nickel prices edged higher in February thanks to rising stainless steel production in China. There is now a fall in China’s construction PMI which suggests that the property sector will face headwinds. This is sure to weigh on nickel demand.

On March 3, nickel was trading at $17,800/tonne. In Q2, the rate may decline to an average level of $17,000 and in H2 this year some 10 per cent lower.

Aluminium market is in surplus as output continues to grow relentlessly. Stocks held at exchanges are also at high levels. Off-exchange stocks, too, are estimated to be large. All these suggest an inevitable correction in aluminium prices. In Q2, the metal is likely to lose $100 to trade at an average rate of $2,100/tonne.

We know, lead market is closely linked to the automobile sector. Lead did not join the February price rally as the automobile demand and output was weaker in China, while the euro area faced weak demand in January. Supply is expected to increase because of enhanced recycling of old batteries. This is sure to lead to a downside risk to lead metal prices.

Tin price surged following the coup in Myanmar and supply uncertainties. But the price is unrelated to the market fundamentals, especially the electronics sector. The market deficit is expected to narrow and begin to weigh on tin prices in H2 this year.

The writer is a policy commentator and commodities market specialist. Views are personal