Short-term indicators are bearish

Last Updated: Mon, Mar 18, 2013 04:20 hrs

Base metal prices have seen heavy selling pressure pertaining to policy and leadership transition in the top metal consumer China. Copper, aluminium and zinc are all down four to six per cent so far this year. Continual worries over a fragile global economic recovery and falling Chinese appetite for base metals have played spoilsport with prices.

Investors remain on edge over potential Chinese monetary policy change. China accounts for nearly 40 per cent of world's copper consumption and holds the first position in producing copper and aluminium. Hence, any policy change in that country will influence their consumption habits.

Also impacting prices have been lower import of refined copper to China due to higher smelting operations. High output from smelters has spiked stocks, pulling domestic prices lower to July 2010 levels. However, China's refined copper output in February dropped 1.8 per cent to 483,000 tonnes. But the drop was attributed to the one-week holiday relating to the Lunar New Year. Aluminium production also dropped 2.8 per cent to 1.73 million tonnes in February but was still up 11 per cent from February 2012.

Copper inventories on LME is the highest since 2010. Stocks have almost doubled since early December 2012. Warehouse stocks of aluminium and zinc are near multi-month highs. Meanwhile, forecasts say, 2013 will see a surplus of 120,000 tonnes of copper against the earlier estimate of a deficit of 12,000 tonnes, which could hurt prices in the coming months.

Optimism of a recovery has risen over recent economic releases from the US. And this has prompted investors to take shelter in the US dollar. But this is taking a toll on metal prices. A strong dollar makes dollar-denominated commodities less attractive.

The recent factory output data from the Euro zone indicates the same old story of a region's struggle to emerge from a recession. Recent data showed the output of the Euro zone factories falling more than expected at the start of 2013 and manufacturing in France and Germany slipping. The situation of political limbo in Italy has rematerialised qualms of the euro area crisis. These have pushed base metals lower.

Despite negative vibes in the market, investors are watching the move by China's State Reserve Bureau to buy three lakh tonnes of aluminium and 50,000 tonnes of zinc from smelters with a view to prop up prices. The closing in of the gap between Chinese and global benchmark prices may urge such buying interest.

Looking ahead, a rebound in prices is anticipated on a recuperating US labour market. But the spending cuts in the US beginning March 1, could hinder major recovery in prices as curtailed spending, if policymakers fail to reach a consensus on Budget deficit, could mean doom for metal demand.

In the short term, copper is expected to trade in a tight range of Rs 417-435. However, any gesture of a strong revival of the global economy will boost demand and take domestic prices to as high as Rs 452 or more. Aluminium and zinc are likely to trade with negative outlook in the immediate run targeting Rs 97 and Rs 101 levels, respectively.

The author is whole time director, Geojit Comtrade Ltd

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