Revival in domestic demand to drive up metal consumption, prices

By : Rutam Vora
Last Updated: Wed, Nov 28, 2012 19:20 hrs

A revival in demand from domestic industries, along with stabilising growth conditions in China, would push up consumption of base metals in the coming months. However, analysts are cautious about the uncertainties on European economic conditions and the US fiscal cliff, which would influence trends.

Lack of a sustained trend in global macro-economic conditions restricted investors’ interest towards base metals in 2012. Analysts believe after a phase of weakness in the past six months, base metals would start a revival after the fourth quarter. It is evident from the fact that China’s November manufacturing PMI rose above 50 for the first time in 13 months, showing expansion of industrial activity. Also, US housing has improved in October to the highest since July 2008.

“All data points bode well for future metals demand though, in our view, the market has been more focused on builds in Chinese unreported inventory and the threat of the US fiscal cliff,” Barclays Research noted in its recent report on metals.

Non-ferrous metals, which had showed an uptrend at the time of announcement of the US Fed’s QE3 measures, soon lost steam. Metals, including zinc, copper, lead and aluminium, had shown sharp gains in the range of six per cent to close to 18 per cent between June 30 and September 13, prior to QE3 announcements.

However, this uptrend quickly lost pace and prices of key metals started falling. Between September 13 and November 17, aluminium reported a loss of four per cent, while copper declined by close to 3.5 per cent.

Soon after the global economic crisis surfaced in 2007-08, Fed had announced the first round of QE in November 2008 with purchase of up to $600 billion in assets, which was later expanded in March 2009 to $1.7 trillion of treasury debt, mortgage-backed securities and debt instruments.

QE2 was announced in the latter part of 2010, with the Fed saying it would buy $600 billion in long-term treasuries, in addition to the reinvestment of an additional $250-300 billion in treasuries out of earlier proceeds from mortgage-backed securities.

However, metal prices have showed signs of revival in recent trades. On Wednesday, LME copper quoted at $7,796 a tonne, LME aluminium traded at $2,003 a tonne and zinc traded at $1,971 a tonne. Lead has shown most gains since the announcement of QE3, at over four per cent, followed by tin.

“Base metals prices are rebounding from recent lows as China has seen value buying opportunity at lower levels and China’s state reserve fund has recently bought aluminium and zinc for stocking. This is likely to continue for some more time giving bullish indications for base metals in the coming weeks,” said Ajay Kedia, director at Kedia Commodities, a commodities research and broking firm.

Meanwhile, Angel Broking noted that base metal prices have declined steeply over the past six months and hence realisations of companies are expected to decline during FY13.

With a long spell of weakness in prices, analysts do not expect any major downside in the prices of metals in the days to come. Domestically as well as in the international markets, prices of industrial metals have shown signs of recovery after optimism on Chinese economic recovery.

Also, weaker dollar against the euro is partially helping metal prices to firm up. On Tuesday, the euro was quoted at $1.3.

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