Base metals are likely to remain under severe stress this week following a drastic decline in risk appetite from China and the US where traders and consumers stayed away from fresh buying.
While the government shutdown in the US due to a face-off between the Republicans and the Democrats sent metals market into a tizzy, the ongoing holiday in China also hampered global trade amid uncertainty of traders’ move.
After a downward move, base metals led by copper recovered a bit towards the end of last week on short-covering from opportunistic investors. In the last one month, however, base metals largely remained range-bound in global markets as they await directions from major economies.
“Unless the US shutdown gets resolved, which looks impossible in a week or two, the Chinese traders would not take a hasty trade decisions. Therefore, base metals will remain lower this week,” said Gnanasekar Thiagarajan, director, Commtrendz Research.
The US deadlock resulted in nearly 800,000 government employees going out of work. The stand-off also sent the dollar near an eight-month low.
For long term, however, the outlook for base metals remains weak. A Natixis report on base metals said China had dominated the base metal markets, making up 40 per cent or more of global supply and demand. The consultancy believes copper price to continue declining on surplus of availability. From the level of $7,950 a tonne in 2012, the average copper price will steadily plunge to $6,750 a tonne by 2015, it said.
The aluminium market is likely to shift from surplus to deficit between 2013 and 2015 as Chinese authorities take more drastic action to curb overcapacity. Also, the proposed LME warehouse rule changes are likely to free up as much as 1.4 million tonnes (mt) of metal over the coming two years. Natixis forecasts aluminium price to average at $1,900 a tonne in 2014 and $2,050 a tonne in 2015.
Despite a substantial deficit in the global lead market in 2013, prices have failed to make any gains this year. In part, this can be attributed to the weakness in base metal prices more generally, but it probably also reflects a lack of concern in the Chinese market. In the US, fundamental changes to both recycling and new battery technology are heralding a significant rise in demand for lead, which could become a significant factor if trends evident in the market become more firmly entrenched. After an average of somewhere around $2,150 a tonne in 2013, the average lead prices may remain at $2,350 a tonne in 2014 and followed by $2,550 a tonne in 2015.
Andrew Shaw, a commodity analyst with Credit Suisse, said: “Mine-through-refined copper supply growth will trigger a steady transition into surplus markets (especially as Chinese smelters convert concentrate accumulations to metal), with consequent erosion of the metals 'scarcity premium’ in 2014. This waning may have been pushed back a little, but we still expect prices to be $1,000 cheaper at this time next year.”
In contrast, zinc and lead appear to be poised to swing the other way after years of supply excess market deficits could emerge in 2014. In the case of zinc, a hefty overhang of inventory, for now largely tied up, may defer the point at which upward moves in prices gain stronger traction but 2013’s levels are providing no incentive to invest in new supply.
The prospects look anything but rosy for aluminium and nickel. For both, supply growth looks set to swamp demand, principally at the hands of Chinese suppliers. These two metals are structurally in the weakest shape; with little scope for sustained price rises over much of the course of the next 12-18 months.
Of course, caveats abound, not least due to uncertainties over Indonesia's looming ban on ore shipments from next January, but we consider downside price risks to have grown in the absence of meaningful supply cuts, said a report from Credit Suisse.