G Chandrashekhar

Hard truths

G Chandrashekhar | Updated on January 12, 2018 Published on June 04, 2017


Supply constraints could lift base metals prices

While risks abound, there is widespread expectation of a marked improvement in economic activity in the second half of the year as the world growth seems to be poised for a modest pick-up in 2017 to about 3.3 per cent and further to 3.6 per cent in 2018 (from less than 3 per cent in 2016).

The risks to growth expectations include a possible Fed rate hike and its impact on the dollar as also movements in crude oil prices. Additionally, volatility will induced by Trump’s policies and his ability to push through his agenda.

Given this outlook, the base metals market looks set to tighten in the months ahead with an impact on prices. In Q1 this year, metals prices in general surged by about 10 per cent on the back of strong demand and supply constraints. China’s metals demand for infrastructure projects and manufacturing activity continues to be positive though growth has been slowing.

While discussing the outlook for the global metals market, the focus invariably turns on China. In the last two or three, the Asian major has been in a de-stocking mode, which was recently accentuated by credit squeeze.

This situation is expected to ease soon and the restocking cycle will emerge in H2, according to industry watchers who assert that fixed asset investment in China continues with a marked improvement in private investment. The country may announce a new stimulus package.

That China is slowing is common knowledge, but what many overlook is the fact that the country is slowing from a high base. China is currently facing an ‘orderly growth slowdown’.

So, overall, under China’s lead, the world demand for base metals looks positive; but the supply side will be the chief differentiator this year. The world market will surely be sensitive to the potential of supply disruption caused by labour action, natural calamities, mine cutbacks, closures and policy driven supply constraints.

It is within this framework, that one can expect price gains in copper, lead and zinc in the months ahead. As for copper, mine supply disruption due to strikes and other events have taken about 400,000 tonnes out of the market. However, the surge in scrap availability is seen boosting refined production.

It may take a few months for the scrap glut to work off and when that happens the copper market will begin to tighten. For 2018, the average is currently projected at $ 6,400/tonne.

Zinc is already in the bull market phase although prices of late have taken a breather. Again, it is the supply side story with mine cutbacks and closures. At the same time, mines are seen responding to high prices with higher supplies.

Zinc prices will rally again when evidence of market tightening surfaces. Nickel prices have remained weak in recent months due to uncertainty over supply-side issues in Southeast Asia. Ore exports from Philippines may be less-disrupted while Indonesian shipments are likely to be more than initial indications. However, LME stocks are seen trending up.

The market anticipates a deficit in aluminium due to reduction in LME stocks and threat of supply cutbacks in China. Simultaneously, there is capacity expansion in China and the Middle East. All these suggest that there is limited room for large move above $ 2,000/tonne. A sustained bull case for aluminium seems to be hype and little else.

The writer is a commodities and agribusiness specialist

Published on June 04, 2017
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