Time To Touch Base

Rahul Oberoi/Money Today        Print Edition: April 2012

You need nerves of steel to invest in base metals this year. The picture for copper, nickel and aluminium doesn't seem too rosy, at least in the near term. However, over the long term, these, barring nickel, may give good returns.

A World Bank report, Global Economic Prospects, released in January says the average price of these metals is expected to fall 6 per cent this year. The reasons, it said, were lower demand and rise in output as new projects go on stream.

Metal investors failed to get good returns in 2011 due to fall in demand as the European Union (EU) and the US went into recession and China tightened its monetary policy. During the year, the London Metal Exchange (LME) Index fell 21 per cent, and was at 3,306 on 30 December 2011. On 29 February 2012, the index was at 3,751. The index tracks six metal contracts - aluminium, copper, lead, nickel, tin and zinc-in US dollars.

How will the domestic scene pan out?

Renisha Chainani, commodity manager, capital markets (individual clients), Edelweiss Financial Services, says, "The European debt crisis and uncertainty in the US is dampening prices. Any positive development in the EU and the US will be a plus."

ROAD AHEAD

6 PER CENT is the fall the World Bank expects in metal prices in 2012 due to low er demand and commissioning of new projects.

COPPER: In 2011, copper lost 21 per cent value on LME. It fell $2,011 per tonne during the year and was at $7,557 per tonne on 30 December 2011. It touched a high of $10,160 per tonne on 14 February 2011 but fell after that due to worries over recession in the US and the EU countries. It touched a low of $6,735 per tonne on 20 October 2011. The fall in India was 9.75 per cent during 2011.

World Bank view:
In 2011, the global price fell due to high inventory and low demand. The red metal is expected to rebound as global growth recovers and China stocks up. Over the medium term, however, the price is expected to fall as demand slows and new capacity comes on stream, creating a small surplus. On 29 February 2012, the metal was trading at $8,638 per tonne on LME.

Domestic view:
Indian experts agree with the Bank's outlook for the next few months. Naveen Mathur, associate director, commodities and currencies, Angel Broking, says, "In the next three-four months, any upside will be limited. In the long term, we expect prices to rise due to supply problems, falling ore grades and demand from China."

Quote

Copper: In the long run, we expect copper prices to rise due to supply problems, falling ore grades and demand from China.

Naveen Mathur

Associate Director, Commodities, Angel Broking

Experts say prices are likely to go up as China and India loosen monetary policies, increasing the supply of money. In addition, concerns over supply, improvement in the US economy and the direction the debt crisis in Euro zone countries takes will decide prices in the coming months.

Harish Galipelli, head, commodities, JRG Securities, says, "The PMI (Purchasing Managers Index) has expanded in the last few months, which may push up prices. A lot depends on the demand from industry and the housing sector. We expect LME prices at $9,000-9,200 by the end of the year with average price at $8,700-8,800. Prices may stay between Rs 490 and Rs 510 per kg on the MCX." The PMI indicates the health of the manufacturing sector.


ALUMINIUM: Globally, aluminium prices fell 18 per cent, or $453, in 2011. The metal was at $2,017 per tonne on 30 December 2011 on LME. On MCX, it dipped 4.75 per cent to Rs 104 per kg during the year.

World Bank view:

Metal investors lost money in 2011 due to fall in demand as the EU and the US went into recession and China tightened its monetary policy.

Prices of all metals, except aluminium, will fall in the medium term. Aluminium would be supported by higher cost of power and other inputs. Alongside, demand is expected to be robust mainly because of the metal's lightness, durability and multiple uses in transport, construction, packaging and electrical industries.

Demand from China has been the main driver of aluminium prices. At present, China's 21 per cent aluminium smelting capacity is outdated and unproductive. The country is fast changing to efficient energy use by shutting down old plants and building new ones. This may limit any downward pressure on prices.

Domestic view:
In contrast, domestic experts are bearish for the short term. However, they say, the metal can move higher than the December 2011 level in the long run.

Quote

Aluminium: Consumption in 2012 is expected to be 44.5 million tonnes, up 6% from 2011. The price may touch Rs 125 per kg on the Multi Com-modity Exchange.

Harish Galipelli

Head, Commodities, JRG Securities

Sumit Mukherjee, fundamental analyst, Karvy Comtrade, says, "We expect pressure in the short term, but prices may recover in the longer run as demand from China, Japan and Euro zone countries is likely to improve by the middle of the year."

Aluminium is gaining ground as a substitute for copper in the power cable and wiring industry due to its lower price, which is creating additional demand. "Consumption is expected to be 44.5 million tonnes in 2012, up 6 per cent from 2011. We expect the metal to test the $2,600 level by the end of the year with an average price of $2,400 on LME. The price may touch Rs 125 per kg on MCX," says Galipelli of JRG Securities.

Aluminum has been trading in the range of Rs 102-113 per kg on MCX since August 2011. On 1 March 2012, it was at Rs 112 per kg.

"Prices have reached their long-awaited resistance level of Rs 113 per kg. Any sustainable close above this will confirm that the short-term bottom has been formed. The bullish momentum sets the near-term target at Rs 120 per kg and then Rs 128 per kg. However, any break through Rs 102 per kg with considerable volumes will dampen the bullish view," says Mukherjee.


NICKEL: Nickel, like aluminium and copper, did not do well in 2011. It fell 25 per cent on LME and 13 per cent on domestic exchanges.

13 PER CENT is the fall in nickel prices in the domestic market during the previous calendar year.

On LME, it fell $6,380 per tonne and was at $18,620 per tonne on 30 December 2011 as against $25,000 per tonne on 4 January 2011. On prospects for 2012, Kunal Shah, head of research, Nirmal Bang Commodities, says the price on LME may not rise above $23,400-23,600 per tonne and test the $18,800 per tonne level on the downside. On 28 February 2012, the metal was at $19,775 per tonne on LME.

On MCX, the metal shed Rs 144 per kg in 2011 and closed at Rs 973 per kg on 30 December 2011 as against Rs 1,118 per kg on 1 January 2011.

In 2011, nickel came under selling pressure due to worsening economic conditions in Europe and China and the rise in use of nickel pig iron as a substitute. There was also an expectation of production surplus.

World Bank view:
Quote

Nickel: The global market is expected to have a surplus in 2012. The metal is likely to trade in the range of Rs 700-1,300 per kg on MCX.

Renisha Chainani

Commodity Manager, Edelweiss Financial Services

Nickel came under pressure in 2011 despite falling inventory and rising demand because of the expected increase in capacity. The price is expected to fall in 2012 due to huge capacity additions.

Domestic view:
Domestic experts back the World Bank view. Kunal Shah of Nirmal Bang says, "Rising production and slack demand from Europe should cap the upside."

Chainani of Edelweiss seconds Shah. "We expect nickel to remain under selling pressure. The global market is expected to have a surplus in 2012. The debt of European countries, slow growth in China and uncertainty in the US will continue to cause tremors in the market. The price on MCX is expected to be in the range of Rs 700-1,300 per kg." On 1 March 2012, the metal was trading at Rs 970 per kg.

How they have performed


DID YOU KNOW?
India, with its large population, is often cited as the "next China" in terms of consumption of commodities. Since 1990, China's consumption of refined metals, including aluminium, copper, lead, nickel, tin and zinc, has jumped 17-fold, and its share of world refined metal consumption has grown from 5 per cent to 41 per cent.

Its average rate of growth since 2000 has been 15 per cent per annum, while demand in the rest of the world has remained essentially unchanged.

India's share of world metal consumption has risen from 2 per cent in 1990 to 3 per cent till 2011. Its demand growth has been only half that of China and much closer to the pace of overall economic growth.

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