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Base metals turn red-hot

Gurumurthy K | Updated on January 08, 2018 Published on January 06, 2018

This pack was supported by global growth, weak dollar and Chinese demand last year. What does 2018 hold? Our analysis

2017 was a good year for commodities, especially base metals. The Bloomberg Base Metals Spot Price Commodity Index continued its up-move for the second consecutive year, after breaking its multi-year downtrend in 2016.

After surging 21 per cent in 2016, the index sustained its momentum all through last year and was up 27 per cent in 2017.

The index is calculated from the spot prices of six base metals, aluminium (45 per cent weight), copper (25 per cent), zinc (15 per cent), lead (12 per cent), nickel (2 per cent) and tin (1 per cent). Barring tin that is down 5 per cent, all others witnessed a robust rally in 2017, ranging from 23 to 34 per cent. Aluminium, which rose the least in 2016, was the outperformer last calendar, surging 34 per cent.

On the domestic front, the strength in the Indian rupee, which gained over 6 per cent against the US dollar, played spoilsport in limiting the upside in commodity prices. Futures of various base metals traded on the Multi Commodity Exchange (MCX) were up between 15 and 24 per cent, with aluminium and copper contracts sharing the top spot by surging 24 per cent last year.

So, what drove metal prices higher in 2017 and what can influence them in 2018?

Global growth

The year 2017 began on a cautious note, with the US Federal Reserve set to hike rates further in the year. With the dollar index hovering above 103, there were increased concerns about global growth getting hit due to a strong dollar and possible rate hikes from the US.

But things turned out to be different in due course of time with growth picking up, boosting consumption. Developed countries including the US, Europe, Japan and the UK posted strong growth through 2017. Europe, which was growing below 2 per cent since 2011, has grown about 2.5 per cent in the third quarter in 2017. The US Federal Reserve has revised its 2018 growth forecast higher to 2.5 per cent from its earlier projection of 2.1 per cent.

Also, manufacturing activity across major nations picked up in 2017. The Manufacturing Purchasing Managers Index (PMI) of the US, Europe, Japan and the UK surged strongly all through 2017. For instance, the US and Europe’s PMI sustained above 50 all through last year and has surged to the levels of 60, indicating strong growth in the manufacturing sector.

A strong pick-up in global growth and manufacturing activity boosted consumption. This, in turn, kept the demand for base metals higher and pushed the prices higher.

Many institutions foresee global growth continuing to improve further in 2018. The International Monetary Fund (IMF) has revised global growth forecast for 2018 to 3.7 from its earlier projection of 3.6 per cent. Goldman Sachs projects the world to grow at 4 per cent this year compared to a projected 3.7 per cent growth in 2017.

Weak dollar

The weakness in the US dollar is also one of the key factors that supported the metal price rally last year. Since commodity prices are quoted in the US dollar, both have an inverse correlation. That is, when the dollar value goes up, commodity prices come down as it becomes costlier for the buyer and vice-versa. So, a weak dollar is always positive for commodity prices.

The US dollar index, which had risen to about 104 at the beginning of the year and was threatening a further strong rally, witnessed a sharp fall all through the year. The index had tumbled about 12 per cent to a low of 91 by September and is currently trading around 92.

The outlook for the dollar index remains negative in the short term for a fall to 90 or even lower. Such a fall in the dollar index will continue to push metal prices further higher in the initial period of 2018.

The China factor

When it comes to metals, China is considered the sole driver of prices. This is due to the fact that this country is the world’s largest consumer of base metals. It accounts for over 45 per cent of global copper demand and 50 per cent of zinc demand. In case of other metals as well, China accounts for over 40 per cent of the global consumption. The country consumes about 40 to 45 per cent of the lead and nickel produced globally. So, the economic condition in China plays a vital role in determining metal price movements.

When forecasters were bracing for the slowdown to continue, China surprised with robust growth numbers in 2017. The country grew at 6.9 per cent in the first half of the year. IMF forecast the growth to stand at 6.8 per cent for the full year 2017. Though IMF expects the growth in 2018 to be slower at a rate of 6.5 per cent, it has revised it higher from its earlier projection of 6.4 per cent. The manufacturing activity in China has also recovered sharply after falling into the contraction phase in June last year. China’s manufacturing PMI surged from 49.5 in June to 51.5 in December last year.

China committing to extend its spending in the infrastructure and transport sectors could continue to keep the demand for metals higher in 2018 as well. China had budgeted to spend about 2.6 trillion yuan last year and is expected to spend the same amount this year as well.

With these three broad factors supporting the entire metal space in 2017, we now take a look at the individual triggers that moved each metal last year and its outlook, going forward.


Production cuts from China as a part of its pollution control measures were the most important trigger for the surge in aluminium prices in 2017. China had also curbed exports to meet the increasing domestic consumption in the automobile and construction sectors. This had resulted in a supply shortage in the rest of the world. The production cut was expected to remove about 4 million tonnes from the market. But reports indicate that its impact on the supply side is much worse and it has reduced the supply by about 7 million tonnes.

The production cut is planned to extend until March and will again come into effect in the months of November and December this year. As such, with five months of expected production cuts, the supply could remain short while the demand is expected to increase on the back of global and Chinese consumption. This could leave the aluminium market in deficit and keep the prices higher in 2018 as well.

What the charts say: The Aluminium contract on the London Metal Exchange (LME), which is currently trading at $2,203 per tonne, has strong support in the $2,000-$1,950 zone. As long as it sustains above this support, a rally to $2,500 is likely. An intermediate corrective fall from $2,500 to $2,300 cannot be ruled out. But an eventual break above $2,500 will pave the way for the next target of $2,700.

The outlook will turn negative only if it declines below $1,950. Such a break can drag it to $1,850 or even $1,800.

The MCX-Aluminium contract (₹139 per kg) has a key resistance at ₹147. If it remains below this hurdle, a broad and a volatile range-bound move between ₹130 and ₹147 can be seen for some time. But if the contract manages to breach ₹147, a fresh rally targeting ₹160 is likely.


According to the International Lead and Zinc Study Group (ILZSG), the market for zinc is forecast to remain under a deficit of 223,000 tonnes in 2018 on the back of increased consumption from the US and Europe. It expects US demand to increase by 12.2 per cent and 2 per cent, respectively, in 2017 and 2018.

The European consumption is expected to rise 2.8 per cent in 2018 from a marginal 0.4 per cent increase last year. Chinese consumption is forecast to increase by 3 per cent due to strong demand from the steel sector. A deficit market can aid in keeping zine prices above $2,000 and move higher towards $3,500 and $3,600 levels in 2018.

What the charts say: The LME-Zinc ($3,354 per tonne) contract, which has been range-bound between $3,000 and $3,300, is showing a bullish sign of breaking this range above $3,300. The contract can gain fresh momentum on a decisive break above $3,400 to target $3,750. The bullish outlook will get negated only if it declines below the psychological $3,000 mark. The next target is $2,500.

The outlook for the MCX-Zinc (₹214 per kg) futures contract is bullish with strong support at ₹200. A rally to ₹225 is likely in the short term. If the contract manages to break above $225 decisively, then the possibility of the current uptrend extending to ₹240 levels cannot be ruled out. The view will turn negative if the contract falls below ₹200. The ensuing targets on such a fall are ₹180 and ₹170.


Copper prices in 2017 were largely supported by supply disruptions due to labour strikes in the major producing countries like Chile, Peru and Indonesia. Though this is a temporary price driver, any such strikes in the coming year could create short-term volatility in copper prices.

Increasing spending in the infrastructure sectors in major countries like China, coupled with a pick-up in global growth, is expected to keep copper demand high in 2018. The International Copper Study Group (ICSG) expects the global copper demand (ex-China) to increase by 1.5 per cent in 2018 while China’s demand is forecast to increase by 3 per cent. This, according to ICSG, may leave a deficit of 105,000 tonnes of copper this year.

Since the major trigger for the price rally came from the labour strikes, if this issue gets resolved this year, then it might restrict the upside in the prices to $8,000 levels in 2018.

What the charts say: For LME-Copper ($7,121 per tonne), an inverted head and shoulder reversal pattern is visible on the charts. The levels of $6,500 and $6,000 are strong supports. A rally to $8,000 is likely. A strong break above $8,000 is needed for the contract to extend its rally to $8,400 and $8,800. But a pull-back from $8,000 can trigger a corrective fall to $7,500 or even $7,000.

The outlook for the MCX-Copper (₹453 per kg) contract is bullish with a strong and confirmed inverted head and shoulder reversal pattern on the charts. Immediate resistance is around ₹490. A strong break and a decisive weekly close above this hurdle will increase the likelihood of the contract rallying to ₹550 and ₹560 levels this year. Key supports are at ₹410 and ₹385.


Strong demand from steel industries and electric vehicles is a major positive driver of nickel prices. Also, nickel is one metal which has not witnessed a robust rally over the last couple of years unlike Zinc and Aluminium. So, nickel prices continuing at current levels puts pressure on miners to sustain profitability. If the prices fail to witness a sharp rally and stay at lower levels, that might lead to supply disruption due to mine closures. A possible supply disruption, coupled with an increased demand from the steel sector, can drive nickel higher in 2018 to $15,000 levels.

What the charts say: LME-Nickel ($12,525 per tonne) futures contract can test $13,000 in the near term. A strong break above it can take the contract higher to $15,000. A corrective fall to $13,500 and $13,000 is possible from $15,000. But an eventual break above $15,000 can take the contract higher to $20,000 over the long term.

The MCX-Nickel (₹794 per kg) has risen decisively above the key resistance level of ₹760 last month. The immediate outlook is bullish for a rally to ₹870 or even ₹900. The outlook will turn negative for a fall to ₹745 or even ₹700 if the contract breaks below ₹760.


Increasing demand from the automobile sector, especially from the US and Europe, will largely drive lead prices higher this year. Although the emerging demand for electric vehicles is a threat to lead, its actual impact might take time to get reflected in the prices. Until then, the automobile sector demand will continue to support lead prices.

The ILZSG forecasts lead demand to increase by 0.9 per cent to 11.82 million tonnes in 2018. It expects the lead market to end with a deficit of 45,000 tonnes this year.

What the charts say: The LME-Lead ($2,540 per tonne) contract is hovering around the key resistance level of $2,500 over the last couple of months. The bias is bullish for it to target $3,000 in the coming weeks.

The MCX-Lead (₹162 per kg) futures contract is stuck in sideways range between ₹155 and ₹165 for more than two months. The bias is positive to witness a strong break above $165 in the coming days as the 21-week moving average has been consistently limiting the downside over the last several weeks. A strong break above ₹165 can take the contract higher to ₹174.

The view will turn negative only if the contract falls below ₹155 decisively. The ensuing targets are ₹150 and ₹145.

Published on January 06, 2018
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