Is the bull here to stay?

Gurumurthy K | Updated on: Jan 12, 2018











Base metals have moved up smartly over the last calendar. What’s the outlook for these metals? Here’s an analysis

It was a year of surprises for the global financial markets in 2016. Even as the global economy continued to decelerate, a series of unsettling events unfolded. The first blow came from Europe in the form of Brexit. In June 2016, Britain surprisingly voted “Yes” to leave the European Union. The next shock came from the US in November when it elected Donald Trump as its new President.

Even as events like these were jolting the markets, one asset class was enjoying a smooth and a sharp recovery rally. Commodities, especially the base metals segment that was suffering a multi-year downtrend, witnessed a strong reversal in 2016. It’s therefore not surprising that the Bloomberg Base Metals Spot Price Commodity Index outperformed the major global equity indices and even gold, with a whopping 21 per cent return in 2016.

The Metal 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). The index recorded a peak of 275 in February 2011.

But after that, a huge supply glut, weak demand and the global economic slowdown played spoilsport. The index was in a prolonged downtrend for about five years after that. This long-term decline halted at the low of 128.5 in January 2016, after which there has been a sharp recovery. The index has surged about 39 per cent from this low to the current levels of 179.

What led to the halt in the multi-year decline? What were the triggers for the price reversal? Can this rally sustain, going forward? Here are some answers.

The background

Global producers were badly hit by the extended fall in base metal prices. This resulted in a number of major producers shutting down capacities and closing mining operations. For instance, commodity majors like Glencore, Century Mines and Nyrstar announced sharp cuts in their copper, zinc and coal production spread over many phases. This helped reduce the oversupply in the market. This, coupled with two other major events in 2016, supported the rally in base metal prices last year.

First, China’s fillip to infrastructure projects in the transport sector, including rails, roads, waterways and airports, stimulated demand. China plans to spend over $720 billion, over three years from 2016 to 2018, covering more than 300 projects in the transport sector. China is the world’s largest consumer of metals as it consumes over 40 per cent of the global production. So, any fresh demand created by the world’s largest user will definitely be a big positive for metal prices.

The second is the surprise victory of Donald Trump in the US Presidential elections in November last year. Trump has talked of a big push to improving infrastructure in the US to accelerate economic growth and increase employment. Trump has plans to spend $1 trillion on US infrastructure over the next 10 years. During his campaign, Trump had promised huge job creation in construction, manufacturing, and other sectors. The spending plan and Trump’s “America’s Infrastructure First” policy have boosted the prices of copper and other industrial metals like steel as US demand for these metals is expected to rise from these sectors.

It’s time to watch China

It is clear that China and the US were the major drivers of metal prices last year, alongside reduced supply. So, will the US and China continue to play a major part in determining metal prices in 2017 as well?

Yes, but it is going to be China which has to be watched closely as it is the world’s largest consumer of base metals. Take, for instance, copper. Data from the International Copper Study Group (ICSG) suggests that Asian countries are the largest consumers of copper, consuming 63 per cent of the global output. China is the world’s largest copper consumer, accounting for over 45 per cent of the global demand. The Americas (both North and South America together) consume just about 13 per cent of the global copper. The US consumes roughly 7 per cent of the total global copper production. Thus the impact of the US and Trump’s infrastructure spending plan, on copper prices, could be short-lived.

In case of other metals as well, China leads the chart when it comes to consumption. The country accounts for 40 to 45 per cent of the global lead and nickel demand and 50 per cent of zinc demand. In case of aluminium, China consumes about 60 per cent of total global produce.

Reports suggest that Trump’s infrastructure spending may not create a huge incremental demand in the metal spaces in order to drive prices sharply higher. Also, Trump would need more than $3 trillion of funds for infrastructure development. So the trends in Chinese demand need a closer look compared to the events unfolding in the US, though the latter can create short-term volatility in prices.

After seeing the big picture, we now take a look at how the demand-supply scenario is going to turn out in different base metals. We also take a look at what the charts say on the domestic front on the base metals futures contract traded on the Multi Commodity Exchange (MCX).


Aluminium prices bottomed in October 2015 and then surged over 30 per cent from there. China, the world’s largest producer, is projected to add 2.8 million tonnes to the global supply from its new projects this year. The global supply is expected to increase by 4.5 million tonnes, up 6 per cent from last year. The increase in supply may keep a check on the upside in aluminium prices. There is an increase in demand from the automobile sector to make lighter and fuel efficient vehicles using aluminium compared to steel. This factor may aid in limiting the downside in aluminium prices. Combining the above two factors, one may expect aluminium to remain broadly range-bound, but with a bullish bias, considering China’s infrastructure demand.

Another important indicator that will need a watch is the inventory levels in the London Metal Exchange (LME). The aluminium inventory has been falling over the past four years and if there is an increase in the inventory on the back of additional supplies hitting the market this year, it may cap the upside in the prices.

On the charts: The MCX-Aluminium futures contract (₹125 per kg) has a very strong resistance around ₹130 per kg. A strong break above this hurdle is needed to see the rally extending to ₹140 levels. Inability to break above ₹130 may keep it broadly range-bound between ₹115 and ₹130 for some time. The outlook will turn negative for a fall to ₹110 if the contract breaks below ₹115 decisively.


Zinc was a clear outperformer in 2016 with a whopping 60 per cent rise on the back of sharp capacity cuts and consistent deficit situation for many years. 2017 is also going to be a deficit year for zinc, predicts the International Lead and Zinc Study Group (ILZSG). For the year the institute forecasts that production will increase 2.9 per cent to 13.6 million tonnes and demand will rise 2.1 per cent to 13.85 million tonnes from last year, thereby leaving the market with a 2,50,000-tonne deficit. A prolonged deficit situation in the market will result in zinc prices outperforming the others in the base metal space going forward as well.

On the charts: MCX-Zinc has skyrocketed 102 per cent from its December 2015 low of ₹97 per kg to ₹196 per kg now. The sharp rally has increased the possibility of a sideways consolidation for some time. This is evident from the price action since December 2016 when prices halted at a high of ₹204. A range-bound move between ₹170 and₹205 looks likely in the short term. A breakout on either side of ₹170-205 will decide the next trend.


Unlike zinc, the lead market is expected to remain in surplus in 2017. However, the surplus is projected to come down from the levels of 2016, according to the ILZSG. In 2017, refined lead demand is expected to increase 1.3 per cent to 11.34 million tonnes and leave the market with a surplus of 20,000 tonnes, down from the 42,000-tonne surplus expected for 2016. Demand for lead-acid batteries from the automotive sector will be a key driver for this metal. But the growing e-bike market, which uses lithium-ion batteries, may evolve as a big dampener for lead demand in the coming years and will need a close watch.

On the charts: The MCX-Lead (₹161 per kg) futures contract has been consolidating broadly between ₹150 per kg and ₹165 per kg for about a month within its overall uptrend. The bias remains bullish on the charts as long as it trades above ₹150. A rise to revisit the 2016 highs of ₹175 levels is possible over the medium term. A strong break above ₹175 will also pave the way for the next target of ₹185.


Copper prices got a real boost only after the US elections last year. This rally has already lost steam, as is visible from the broad sideways range-bound movement for more than two months now. The market for copper is expected to turn into surplus in 2017. The International Copper Study Group (ICSG) forecasts 2017 to end with a 163,000-tonne surplus as demand is expected to grow at a slower pace of 1 per cent compared to a 2 per cent rise in supply. The surplus situation may see copper lagging behind other metals this year.

On the charts: MCX-Copper (₹408 per kg) may trade sideways between ₹365 per kg and ₹410 per kg in the short term. A breakout on either side of ₹365 or ₹410 will decide the next trend for the metal. A break below ₹365 may drag it to ₹340. On the other hand, if the contract manages to breach above ₹410, it can see a rally to ₹450 or even higher thereafter.


Nickel has been a laggard and has failed to revisit its previous highs unlike other metals, despite a 35 per cent rally over the last one year. The prices are still far away from the peak levels recorded in 2014. Indonesia’s ban on nickel ore exports was offset by an incremental supply from other regions like the Philippines. Nickel prices may continue to lag behind other metals as Indonesia plans to revoke its export ban which may add about 5 million tonnes to the global supply. But on the other hand, output cut announced by major mines in the Philippines may offset the capacity addition from Indonesia.

On the charts: The outlook for the MCX-Nickel (₹710) futures contract is unclear. The contract has come off sharply from the high of around ₹800 made in December. But the recent reversal from the low around ₹636 retains the short-term bullish bias. A rise to revisit ₹800 is likely in the coming weeks. Inability to break above ₹800 may keep the metal range-bound between ₹635 and ₹800. A strong break and a decisive weekly close above ₹800 is needed for the Nickel futures contract to gain fresh momentum for a fresh rally to ₹900 or even higher.

Published on February 12, 2017
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