After a pandemic-struck year loaded with economic uncertainties across markets, 2021 seemed to be a promising year with China becoming a key importer of major commodities. But with the Chinese New Year (CNY) or Lunar Holidays ahead, will the momentum sustain?
Usually celebrated for a week and sometimes longer, the Chinese New Year (falls on February 12 this year) brings with it a period of lull demand that casts its shadow on the global markets. The average pace of business slackens and daily trading volume tends to dip, resulting in prices acting jumpy.
With Asia’s participation in commodity futures growing by the by day, the impact is expected to be felt across the globe. Speaking with BusinessLine , Bhavik Patel of Tradebulls Securities, said, “Buyers usually stock up before the Chinese New Year holiday. And, then, during the holiday of a week to ten days, the market remains dull without much price movements and since volumes are low, brokerages don’t take huge positions”.
Buying and gifting precious metals for the Chinese New Year is a tradition being followed in the dragon country. December and January have, thus, been better months for retailers historically. This time, though, platinum and silver trading volumes jumped, while that of gold plummeted.
On the Shanghai Gold Exchange in the last week of January, gold trading volumes plunged 22.14 per cent; silver trading volumes rose 8.94 per cent, while that of platinum soared 156.29 per cent. From the delivery point of view, the delivery volumes of gold were much higher than that of silver for the same period, indicating that the physical demand for the former is stronger.
Kunal Shah of Nirmal Bang Securities, said, “The outlook for commodities, in general, is bullish. This temporary holiday season will not affect the prices much though the vaccination drive and duty cut may put prices under pressure. The fundamentals remain intact in the long term.”
Bhavik Patel said the stronger Chinese yuan weighed on the prices of precious metals and the demand has taken a hit this year because of the pandemic. “Going ahead, I only see increase in gold prices because of the inflationary pressures.”
Pull-backs in base metals
Towards the close of 2020, the prices of base metals saw a rebound, driven by hopes of the roll out of Covid-19 vaccine and Chinese stimulus. However, 2021 has not started on a good note. Copper, after spiking to a record high in the first week of January, turned vulnerable to a sell-off. The metal trades at $7,823/tonne now, down from January high of $8,237. Zinc, which rallied despite all odds in November and December, saw its momentum drop due to excessive inventories; it trades at $2,627/tonne now, down from above $2,900 levels in January. Aluminium, too, has been a victim to sell-off in the market and now trades at $1,993/tonne from $2,040 levels in the first week of January. Tin was the only base metal that escaped the sell-off and gained.
While the IMF’s projections point to an 8.1 per cent expansion in the Chinese economy this year, there are doubts over the strength of the rally in metals. Analysts are expecting a trend reversal. This is despite a possible pick-up in demand after the New Year holidays.
“Usually after the lunar holiday season is over, demand picks up as a result of shortage of raw material all over the world, with China being a a major exporter. However, this time, one can’t be sure about how the market is going to behave. Base metals saw a sharp rally towards the end of last year and we expect the gains to be lost with China dragging down the entire base metal pack as it tightens credit growth...”, said Bhavik Patel.
Risk-off sentiment in base metals may continue in March, add other analysts too. However, one needs to watch out if China continues to extend or tighten the stimulus. This year is year of the Ox in China. When it was the year of the Ox in 2009, there was a strong recovery in metals. It remains to be seen whether a similar bullish trend will be seen in metals in 2021.