TREND: After stellar run, fundamentals seen catching up with metals

Thursday, Sep 10, 2020


By Rituparna Ghosh


NEW DELHI – Industrial metals may have been inadvertent beneficiaries of the COVID-19 pandemic, but experts say participants are ignoring the fundamental principles of demand and supply.


The LME metal index has gained over 30% since mid-March, when COVID-19 was declared a pandemic. Copper prices on the MCX rose over 35%, while nickel and zinc were up over 25%, lead over 15%, and aluminium over 5% during the same period.


"In our opinion, there is no fundamental justification for the high prices given that many metals markets are heading for high supply surpluses this year. Most market participants have been turning a blind eye to this so far," said Daniel Briesemann, an industrial metal analyst at CommerzbankAG.


"The latest surge in metals prices has been driven to a large extent by speculation: net long positions in almost all have been expanded noticeably further of late," he added.


The rise in metal prices has largely been driven by a fall in supply as rising COVID-19 cases led to the shutdown of many mines. Prices started rising further as demand from China started picking up after the nation started easing lockdown restrictions. The US dollar index falling to its lowest level in two years earlier this month also supported sentiment.


But with major mines having already resumed production and China importing metals in large quantity to meet its immediate needs, experts say prices may consolidate at current levels. 


"Looking at current price levels, it seems that most of the positive news has already been factored in while negative factors lack the element of shock. Considering this, we believe that the metals pack may see consolidation at current levels with upside bias intact. US elections later this year, however, remain a major risk factor," said Ravindra Rao, head of commodity research at Kotak Securities.


He sees the average price of copper on the LME at $6700 per tn by the year-end, aluminium at $1,820 per tn, zinc at $2,450 per tn, nickel at $15,000 per tn, and lead at $1,950 per tn.


Some also say a correction in prices cannot be ruled out and the only factor limiting the downside is expectation of more stimulus packages ahead of the US elections.


Supply of all metals is expected to exceed demand in the second half of the year. In the case of some metals, production has been in surplus during the first half of 2020, despite the pandemic.


Data from the International Lead and Zinc Study Group showed global zinc supply outstripped demand by 223,000 tn during Jan-May, against a deficit of 109,000 tn a year ago. The surplus for lead was at 23,000 tn, against a deficit of 5,000 tn a year ago. For both metals, the surplus was despite extensive lockdown measures in producer countries.


Further, refined zinc and lead production in China increased to their highest levels this year in July, while stockpile of the metals is at its highest in nearly two years.


According to Commerzbank AG, zinc and lead prices are now detached from the fundamentals. "We believe they should be significantly lower from a fundamental viewpoint."


In its latest report, the International Copper Study Group has said that the production capacity of copper mines globally is expected to increase around 4% every year from 2020 to 2024, following annual average growth of 1% from 2017 to 2019.


Copper prices also gained strength due to arbitrage between prices on the London Metal Exchange and Shanghai Futures Exchange. Stockpile of the metal in LME warehouses fell to its lowest level since 2005, but on the Shanghai Futures Exchange, stocks were higher due to improved demand in China.


In Apr-May, copper prices were down as most countries barring China were in lockdown. Taking advantage of this fall, China's refined copper imports hit an all-time high in June and July. During Jan-Jul, imports of refined copper totalled 2.5 mln tn, up 33.7% on year. This was the steepest rise in imports since 2009.


However, following the recent rise in prices, China's imports of refined copper are unlikely to remain strong as the arbitrage has dried out, said a trader with a Switzerland-based trading firm.  


While he expects copper supply to rise in the second half of the year, he says there is no concern over markets being flooded as consumption may pick up in other regions as the impact of the pandemic subsides.


The aluminium market was in a surplus of 1.3 mln tn during Jan-Jun, data from the World Bureau Of Metal Statistics showed. During 2019, aluminium surplus stood at 735,000 tn. Rusal, the world's largest producer of the metal outside China, said the rise in production was despite around 24% of the global capacity turning loss-making.


Demand for aluminium remains weak this year due to lower demand from the automobile sector, a key consumer. CRU Group has forecast that aluminium demand from the transport industry will fall 10% in China, 37% in India, 27% in western Europe, and 26% in North America.


For nickel, the case is fairly balanced compared to other metals due to Tesla's robust procurement of high-grade nickel for manufacturing electric vehicle batteries.


Commodity consultancy firm Roskill has suggested that the rise is unlikely to sustain over the remainder of the year as a large surplus is looming. US-based Citi Group expects the nickel market to be oversupplied by 135,000 tn this year and 117,000 tn in 2021.


The nickel market was in a surplus of 33,300 tn during Jan-May, against 29,100 tn a year ago, data from World Bureau of Metal Statistics showed.


Even though the manufacturing Purchasing Managers' Index for China has recovered, this may not be an indicator that metal prices may rise, as there are a lot of underlying factors at play, says Regsus Consulting Director Sandeep Daga.


"The effect of Chinese stimulus is flat-lining… The government had front-loaded the stimulus package to stave off the economy from a crisis. Most of the large Chinese smelters are back from maintenance shut-down and large availability of scrap could become a headwind for metal prices ahead," Daga added. He feels that if the red metal slips below $6,550 per tn, it could fall further.


Experts say prices will rise further only if other countries come out of lockdowns and demand picks up. Prices may also rise if trade tensions between the US and China ease. 


For now, with all the positive news factored in, consolidation or a correction in prices looks likely unless exports from China gain strength.  End


US$1 = 73.47 rupees


Edited by Maheswaran Parameswaran


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