Commodity Analysis

Global slowdown caps base metals

Satya Sontanam | Updated on August 11, 2019 Published on August 11, 2019

Growth in India has been weighed by slowdown in auto and construction sectors

The US’ recent announcement to levy 10 per cent tariff on another $300 billion worth of goods being imported from China, and the latter’s retaliatory move to halt the import of agricultural produce from the US, gave jitters to the whole world which is already reeling under a slowdown.

Base metal prices, which are quick to react to any global uncertainties, did react much. The drop in the LME (London Metal Exchange) prices of the metals after the tariff announcement was not as alarming as the manic price movements in gold and crude oil.

It’s likely that the metal prices had already factored in the impact of the worst possible fallout of the trade negotiations.

Despite a strong supply-demand dynamics for the metals, a further rise in the LME prices are capped by the signs of the global economic slowdown.

Slowdown in economies

The demand for base metals depends on the prospects of the global economy.

While a slowdown in growth psychologically hurts investor sentiments, it leads to reduced capital expenditure by corporates.

China, the top producer and consumer of metals, is facing tremendous pressure after US president Donald Trump directly targeted the nation, accusing it of cheap exports. The tariff war between the two nations could be the reason for China’s GDP growth slumping to 6.2 per cent in the second quarter of 2019, the weakest in 27 years. The Purchasing Managers’ Index (PMI), which represents the economic health of the manufacturing sector, continued to be in the sub-50 levels in July, indicating contraction.

The US, too, shows signs of a slowdown as the country’s GDP in the second quarter of the year grew 2.1 per cent, compared with the 3.1 per cent recorded in the first quarter.

Experts believe that a recession in the US is imminent and would be caused mainly by its own import tariffs and weak global activity.

Though Japan, one of the top metal consumers, showed a modest growth of 1.8 per cent (beating estimates) in the second quarter, following a revised expansion of 2.8 per cent in the January-March period, sluggishness in exports could be a concern for future growth.

Meanwhile, consumption in Asia is slowing down after the industrial output of Germany, which relies on exports to Asia, fell 1.8 per cent q-o-q in the quarter ended June 2019, reported as the worst annual decline in almost a decade.

Needless to say, growth in India has not been very encouraging recently, weighed majorly by the slowdown in auto and construction industries. As per a RBI report, India’s Index of Industrial Production (IIP), which moderated in May 2019, was pulled down by manufacturing and mining even as electricity generation picked up on strong demand.

High-frequency indicators of activity in the services sector for May-June presented a mixed picture.

Tractor and motorcycle sales — indicators of rural demand — continue to contract.

Amidst all the gloom and doom, China letting its currency fall against the dollar has added to the existing trade tensions as exports from China has become cheaper not just to the US but across the world.

Further, Central bank rate cuts in the US, Thailand, New Zealand and likely Australia, is creating fears of currency devaluation and the trade war converting to a currency war, which could again impact the trade of base metals.

For the moment, any stimulus injection by the economies is not expected to withhold the force of the slowdown.


From the recent Fed rate cut and the latest tariff imposition by the US, the LME prices of aluminium, copper, zinc and tin fell 2.2 per cent ($1,737 per tonne), 3.1 per cent ($5,743 per tonne), 6.7 per cent ($2,262 per tonne) and 2.2 per cent ($16,875 per tonne), respectively.

Lead and nickel are the only outliers in the pack that ended in green despite having an immediate jump, up 5.3 per cent ($2,085per tonne) and 8.7 per cent ($15,610 per tonne), respectively.

The fall in dollar index (by about 1.5 percentage points) could have limited the drop in the LME prices of the metals denominated in dollar.

Going ahead, while the recent tariff announcement by the US (on textiles, shoes and electrical items) may not have a direct impact on the trade and prices of base metals, the uncertainty being created in global trade caps the rise in metal prices for at least the next 2-3 quarters.

With metal prices seemingly bottoming at their current levels, producers/traders of metals may heave a sigh of relief.

The metal prices would be range-bound, at least, for the next two quarters.

Navneet Damani, Vice-President - Commodity Research, Motilal Oswal Financial Services, believes that one can invest in copper and lead, which are at low levels currently, but the recovery in prices of which is expected to be high once demand revives.

However, users of base metals who hedge their requirement on the metal exchanges can use a wait-and-watch approach for now.

Sandeep Daga, Director at Regsus Consulting (for hedging of base metals), opines that the metals will be range-bound, and there’s no need for users to rush and lock in the contracts at the current levels.

Published on August 11, 2019
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