Commodity Analysis

2018 took the sheen off base metals

Satya Sontanam | Updated on December 30, 2018 Published on December 30, 2018

The Bloomberg metal index declined 16%, in contrast to the rallies in 2016 and 2017

The year 2018 was a rough and poor-performing one for base metals, both domestically and globally. In India, Multi Commodity Exchange (MCX) prices of all non-ferrous metals were largely impacted by global uncertainties due to ongoing trade tensions and movement of US dollar index, rather than by metal-specific trade dynamics within the country.

The price movement on MCX was in tandem with the London Metal Exchange (LME), a global benchmark for metal prices. However, the downfall of MCX prices was lower than that of LME prices on account of rupee’s depreciation over the dollar.

The Bloomberg metal index has been down about 16 per cent since the beginning of 2018 in contrast to the rallies in 2016 and 2017. The fierce fall began in June when the US extended and intensified its import tariffs. Further, China — the largest consumer of most of the base metals —being in the spotlight for US tariff retaliations is causing uncertainties in the global trade.

Amongst the non-ferrous metals, prices of zinc fell the most, by 25 per cent, on LME and touched its two-year low. As zinc is closely linked to steel, 25 per cent import tariff hike by the US on steel trembled the zinc price movement on LME. This is despite zinc’s supply deficit in the global market and reducing inventories.

In case of aluminium, LME prices witnessed significant volatility during the year, beginning with US sanctions on Russian firm Rusal (in April), which contributed nearly 6 per cent to the world’s aluminium output in 2017. This news spiked the aluminium LME prices to multi-year high, which was later mellowed by the imposition of US tariffs. It fell further when the US recently lifted the sanctions on Rusal.

LME prices of copper, too, faced headwinds in 2018. Prices spiked on news of closure of Vedanta’s Sterlite plant that contributes nearly 45 per cent to India’s copper output, but fell gradually with rise in trade uncertainties.

Here, we look at Indian fundamentals of the three most-used and traded metals — zinc, aluminium and copper.

Zn: LME -25%,MCX -16%*

Zinc production in India during January-November 2018 was 662 kilo tonnes (kt), down 9.9 per cent compared with the same period a year ago. This has been due to the transition of a few open-cast mines to underground mines. Decrease in production, too, could have impacted consumption, which fell over 24 per cent y-o-y to 568 kt during the first 10 months of the year.

Global zinc market is most often in deficit. As India consumes less zinc than it produces, it has been a net exporter of the metal for the past few years. But with production loss in 2018, India became a net importer. During January-October 2018, zinc imports increased 9.9 per cent to 155 kt while exports fell 16.10 per cent to 186 kt compared with the same period the previous year.

Going ahead, ramping up of underground mining and higher grade quality are likely to resolve the concerns on the supply side.

Al: LME -18%, MCX -8%*

In India, production of primary aluminium increased 15.70 per cent y-o-y to 2,751 kt during January-September 2018 on account of better capacity utilisations and stable operations of aluminium makers. During the same period, consumption rose 4.7 per cent y-o-y to 1,593 kt. The government’s focus on infrastructure and electrification projects and growth in the auto industry augmented the consumption of the white metal.

Aluminium exports and imports rose 23.90 per cent and 9.3 per cent to 1,590 kt and 286 kt, respectively.

Low import duty on aluminium scarp (about 2.5 per cent) led to an increase of its imports. Domestic players have been demanding a relief from such imports, which is taking away their market share.

Going forward, the demand for aluminium in India is expected to be bright with healthy growth in the electrical and automobile segments.

Aluminium replacing copper in the electrical and consumer durable segments will be a positive for the industry. However, increased cost of production of domestic producers is seen as an impediment.

Cu: LME -17%, MCX -12%*

The shutting down of Sterlite’s copper plant changed the demand-supply dynamics of copper in the domestic market.

Refined-copper production in the country during January-November 2018 fell 34 per cent y-o-y to 509 kt.

In the first 10 months of the year, the country’s imports rose threefold to 62 kt, and exports plummeted 66.9 per cent to 109 kt, compared with the same period the previous year, turning India into a net importer of the metal from being a net exporter earlier.

However, with the resumption of the plant on the cards, copper supply is expected to normalise, and imports are expected to come down.

(Production, consumption, imports and exports numbers were sourced from CARE Ratings. *Annual returns)

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Published on December 30, 2018
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