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Companies using metals as key raw material, have been enjoying low input costs in the last few quarters, thanks to the downtrend in metal prices.
Also read: Steel exports surge in February, but India still net importer
Steel and important metals such as copper, aluminium etc., hit record highs in early 2022 as the Russia-Ukraine war broke out, on fear of supply disruption that could hit the availability of commodities because of the conflict.
However, prices have tumbled since then, due to weak demand and the rate hike cycle initiated by central banks, especially the Fed. S&P/TSX Global Base Metal Index(150.7) is down about 30 per cent from its peak of 212.3 hit on April 1, 2022.
Lower commodity prices helped India Inc with margin expansion in the last few quarters. What is the outlook on the metals front for FY25? Here, we look at the key factors that could decide the price trajectory of metals in the coming months.
The Chinese angle
China’s share of metal consumption accounts for 60 per cent of the global metals demand, according to the World Bank. This signifies the importance of this country in the commodity value chain. So, the Chinese demand is crucial for price recovery.
The property sector in China, which has been on a downward spiral since the breakout of the Evergrande crisis in 2021, is still ailing. Even as the government is making attempts to revive it by easing financing, cautious approach by banks towards lending to realty firms could drag the revival.
This apart, the huge inventory and the housing stock under construction could take years before they are cleared. According to the International Monetary Fund (IMF), housing starts have now dropped by 60 per cent compared to pre-pandemic levels and real estate investment could drop by 50 per cent in the next decade. Manufacturing too, is not encouraging. A Manufacturing PMI (Purchasing Managers Index) level of less than 50 indicates contraction and it remained below that level in China for 8 out of 12 months in 2023.
But, the decline in demand from the property sector was largely counter balanced by demand from renewable energy and Electric Vehicles (EVs) segments.
In 2023, China added 301 gigawatts of renewable energy capacity, which is nearly 60 per cent of the global addition of 510 gigawatts for the year. Within the green theme, the sales of EVs grew 38 per cent in 2023 and their share of total sales reached over 30 per cent in December last year. Thus, the demand for metals such as copper, that have green applications and aluminium, used extensively in the automotive sector, remained steady.
However, going ahead, these may not repeat. While China could add between 200 and 260 gigawatts of green capacity in 2024, this will still be lower compared to 2023. Also, China has already reached its 1,200-gigawatt green capacity target for 2030 and so, the incremental additions will only go down. On the other hand, the growth rate in automobile sales, which stood at nearly 12 per cent last year, could significantly slow to 3 per cent this year. Overall, China, estimated to grow by 5.2 per cent in 2023, has set a lower target of 5 per cent for 2024. The IMF forecasts China to grow at a lower rate of 4.6 per cent.
Also read: Steel demand to slow down next fiscal: ICRA
Though the demand from the green sector remained strong in 2023, the prices of key commodities such as copper and aluminium rose only 2 and 1 per cent respectively. As the consumption slows in the coming months, prices are less likely to be supportive. This is especially true, when supply is forecast to be in excess of the demand in 2024 for most of the metals.
Excess supply
For commodity players, what is probably going to play spoilsport on steel and metal prices is comparatively faster growth in supply than demand.
According to the World Steel Association, the demand in 2024 is set to increase by 1.9 per cent to 1,849 million tonnes. However, because of the overcapacity in China and absence of decarbonisation measures, the production could easily exceed the consumption, weighing on the steel price. In 2023, supply exceeded production by 77 million tonnes and the gap can go up further.
The International Copper Study Group forecasts that the global copper balance could shift from a 27,000 tonnes deficit in 2023 to 4,67,000 tonnes surplus in 2024. While production outages in Chile, China and Indonesia supported prices to some extent in 2023, no major disruptions are expected in 2024. Mining output is expected to grow in Chile, the Democratic Republic of Congo, Indonesia, Peru, Russia and Uzbekistan.
Likewise, the International Lead and Zinc Study group, expects global lead and zinc balance to be at a surplus of 52,000 tonnes and 3,67,000 tonnes respectively. This is nearly a 50 per cent increase compared to 2023. This is because of the increase in primary lead production in countries such as Australia, Canada, China, India and South Korea. For zinc, a strong rebound in Chinese production and expansion of supply from large projects in the Democratic Republic of Congo, Russia and South Africa can result in production outpacing demand growth this year.
With respect to aluminium, even as China is nearing its self-imposed production cap of 45 million tonnes per year, expansion plans are on in other South-East Asian countries such as Indonesia. Consequently, the supply will continue to flow. Similarly, for nickel, supply growth from Indonesia, which accounts for over 50 per cent of the global supply, can result in more stockpiles of this metal.
Generally, subdued global economic activity and easing of supply constraints are likely to have a negative effect on prices in 2024.
Macroeconomics and geopolitics
Global GDP growth, according to IMF estimates, is likely to stay flat at 3.1 per cent in 2024. But importantly, large economies such as the US and China are expected to see considerable slowdown. The former could grow at 2.1 per cent this year compared with 2.5 per cent last year and the latter could slow to 4.6 per cent in 2024 as against 5.2 per cent in 2023.
While the Euro area is expected to see a higher growth rate of 0.9 per cent in 2024 versus 0.5 per cent in 2023, higher interest rates could be a dampener. So, the support for commodity prices from this region could be limited. Higher interest rates in the US can also be a drag. Overall, it is important to note that, as we have discussed earlier, the recovery in China is key for commodities.
The upside risks for the prices can arise from supply disruption due to reasons such as escalation of conflict in the Middle East and the Russia-Ukraine war. This apart, there are issues on the lines of governments not permitting development of new mines due to environmental concerns and production outages due to power or water constraint, etc. Adverse developments on these fronts can push the prices up considerably.
That said, at this juncture, the risks are broadly tilted to the downside because of potential weak economic activity, particularly in China and growing supply of steel and almost all metals. A recovery in prices might be seen in 2025 due to potential improvement in demand but it remains uncertain. So, companies in India with steel and base metals as key inputs are expected to get continued support from the benign prices in FY25.
Technical analysis
Excess supply is anticipated to exert downward pressure on the prices. Broadly, the charts do not show indications of a bullish turnaround at present.
LME Copper ($8,579.5)
Copper futures on the London Metal Exchange (LME) has been oscillating between $7,900 and $8,700 since May last year. Resistance above $8,700 are at $9,000 and $9,400. On the other hand, support below $7,900 can be spotted at $7,200. A break below $7,200 can trigger another round of sell-off, possibly dragging the contract to $6,500 and then to $5,800. Going ahead, copper futures could fall to the price region between $7,500 and $7,200 in the coming months and then establish a long-term uptrend. Note that for the contract to turn the trend bullish, it should decisively invalidate the barrier at $9,400.
Support: $7,900 and $7,200
Resistance: $8,700 and $9,400
LME Aluminium ($2,240)
Aluminium futures on the LME has been charting a sideways trend since May, 2023. It has been fluctuating between $2,100 and $2,385. The chart shows no bias on either side and so, the chances for the consolidation to continue are high. A breakout of $2,385 can lift the contract to $2,500 and $2,650. Note that $2,650 is the critical level and only if aluminium futures surpass this level, can it establish a sustainable rally. On the other hand, in case the contract slips below the strong base of $2,100, we are likely to see a quick fall to $1,950, a support. Subsequent support is at $1,830.
Support: $2,100 and $1,950
Resistance: $2,385 and $2,500
LME Lead ($2,104.5)
Lead futures on the LME, since the beginning of 2023, is moving horizontally. It has been tracing a broader sideways range of $2,000 and $2,300. Within this price region, there is a resistance at $2,170. But even before 2023, lead futures have not been steadily trending in either direction. So, we can expect the contract to behave that way in the coming months. We anticipate lead futures to stay in the $2,000-2,300 range over the medium term. Even if either of the boundaries of the range is broken, there are resistances and support nearby, which can keep movement limited on either side.
Support: $2,000 and $1,915
Resistance: $2,170 and $2,300
LME Zinc ($2,527.5)
Zinc futures, like the other base metals, has been in a sideways crawl. It has been oscillating between $2,270 and $2,650 since May, 2023. Immediately above $2,650 is another important hurdle at $2,700. So, the price band of $2,650-2,700 is a resistance band. If this is taken out, zinc futures can rally to $2,900. A breakout of $2,900 can lead to the contract establishing a strong upswing. But, if zinc futures decline from here and drop below $2,270, it can fall to $2,040 and $1,800. If the downtrend to $1,800 happens, we can expect zinc futures to see a significant bullish reversal off this support.
Support: $2,270 and $2,040
Resistance: $2,700 and $2,900
LME Nickel ($18,011)
Also read: India to be back as net exporter of steel by fiscal-end: Scindia
Nickel futures, which was stuck between $15,900 and $17,200 since November 2023, saw a fresh breakout last month. So, there is a chance for the contract to see further upside. However, the rally can be limited as there are resistances at $18,500 and $20,300. If the bulls can push the price above $20,300, then the long-term trend can turn bullish. But as it stands, the probability for that to occur is low. The upswing could be a corrective rally and we might see the price falling after reaching either of the resistance. If the support at $15,900 is breached, nickel futures can witness a fall to $14,280.
Support: $15,900 and $14,280
Resistance: $18,500 and $20,300
Note: Charts of steel contracts show that the data is not continuous. Hence, we’ve not considered it for technical analysis.
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