Commodity Analysis

Chinese slowdown will soften base metal demand: Sandeep Daga

Satya Sontanam | Updated on October 13, 2019 Published on October 13, 2019

Sandeep Daga, Director at Regsus Consulting, feels the prices will fall further

The 20-year growth story of China is coming to an end, and this would lead to softening of demand for the base metals, says Sandeep Daga, Director at Regsus Consulting, which specialises in hedging of base metals.

Talking to BusinessLine about the outlook for base metal prices, Daga said the prices will go lower in another six months. Excerpts:

How is the health of the manufacturing sector in key economies?

The manufacturing sector has been in the doldrums all over the world for the past few months. Trade volumes are almost stagnating and things are worsening. On the other hand, the US and China have not yet shown any significant progress in resolving the core trade issues.

The slowdown is evident in China, which is the key player in the commodities space.

During the global economic slowdowns in 2012 and 2015, China stimulated the economy, and things were back on track soon. But, this time, though China is trying to stimulate the economy through rate cuts and by speeding up infrastructure projects, the powerful forces of trade war have negated all of it.

This is because the sentiment has become very weak.

The problem is deeper and ideological.

Thus, there may not be any quick resolutions; the weakness in the manufacturing sector is expected to continue.

Do you think base metal prices have bottomed?

No. Prices will bottom when the metal producers start feeling the pinch of low prices.

Though the prices have dropped steeply since 2018, simultaneous depreciation of currencies, such as rupee and yuan, against the dollar, somewhat compensated the loss for local producers.

Normally, when the prices are close to bottom, producers defer capacity expansions and shut down or idle their existing units. The pain has not yet reached a threshold. In fact, higher supply is expected to come into the market in the next few quarters.

So, do you think the prices will fall further?

Yes. I think the prices of the base metals will go lower over the next six months. Especially with the enhanced metal production capacities in China, the supply is going to be high in the next few quarters, exerting pressure on the prices.

Also, looking at the big picture, a big cycle for commodities is over as Chinese growth withers. China had nearly 20 years of economic boom, similar to what the US had in the early 1900s, Europe in the late 1800s, and Japan during 1960-1980.

As China’s growth tapers, there is no other country to fill the void. Thus, the demand growth for metals would remain soft for a few years. The next growth driver for the metals has to come from somewhere else; maybe India. We would know soon. This transition, however, could take time.

Till then, there is more room for the metal prices to slide.

What will trigger the metal prices to go up?

The US slipping into recession — only then will the money start flowing more into the emerging markets and commodities. I believe that the US hasn’t yet completely priced in the impact of the negative fallouts of the trade war; the emerging markets have felt it since the beginning.

So, once US start getting into recession — which I think is highly possible — and the dollar weakens in the long run, it will help the commodity prices move up. But the dollar could strengthen in the short run because of its safe haven status. The emerging markets will stabilise due to higher inflow of money and support the demand. This is expected to happen by mid-2020 or to the end.

What strategy should users of base metals adopt?

I suggest that consumers and traders of metals buy only as much as required and not chase the prices even if they appear attractive. The primary trend is down for the next 2-3 quarters.

Those who are importing metal into India and selling it domestically might find the business unprofitable as the landed costs of the metals are higher than the domestic prices. This reflects the domestic consumption slowdown, which is here to stay till mid-2020.

On the other hand, those looking to export, especially zinc and lead, could see this as an opportune time.

In any such case, I think the trader or the user should brace for volatility and should do the risk management minutely. One should not get too greedy or too hopeful.

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Published on October 13, 2019
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