Proving their Mettle

Rahul Oberoi/Money Today        Print Edition: November 2012

The industrial metal pack has suddenly come to life. The seven metals - lead, tin, zinc, nickel, copper, aluminium and iron ore - which trade on the Multi Commodity Exchange, or MCX, returned 11 per cent between August 16 and September 22, as against a negative 4 per cent return this year till August 14.

What has triggered this rally?

Experts say stimulus measures announced by the European Central Bank, the US and Japan, that will release huge amounts of money into the world markets, are leading to a rally in many asset classes. Plus, there is hope that economic revival will encourage investors to shift to risky assets such as commodities.

Kishore Narne, senior vice president and head, commodity and currency research, Anand Rathi Financial Services, says, "The rally is driven by stimulus packages and the Chinese government's approval to a multi-billion dollar infrastructure programme."

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Naveen Mathur, associate director-commodities and currencies, Angel Broking, seconds Narne and says, "The entire base metal pack erased losses made during this year in the middle of August and bounced back to the positive terrain due to upbeat sentiment triggered by a series of stimulus measures announced by both developing and emerging countries to boost their economies."

In the second week of September, the US Federal Reserve announced purchase of $40 billion worth of mortgage-backed securities every month. This was followed by the Bank of Japan's decision to ease policy and unveiling of China's $150-billion infrastructure programme.

Besides, China would provide subsidies worth $2.2 billion to buyers of energy-efficient computers and airconditioners, which would increase the demand for metals. Experts say these seven industrial metals may rise further.

Copper:

Between January 2 and August 14, copper prices rose 1.5 per cent to Rs 409 per kg. After that, there was a 10 per cent rise till September 22. On September 29, the metal was at Rs 436 per kg on the MCX.

Hitesh Jain, an analyst with IIFL, says, "Macroeconomic numbers from the US, China and Europe throughout the year have not been supportive of prices. In addition, China's refined copper imports have been falling for the past few months. However, of late, prices have been supported by the news of the European Central Bank's unlimited bond-buying and the Federal Reserve's expansive policy."

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According to the World Bureau of Metal Statistics, the global demand for copper for the first seven months of 2012 was 11.93 million tonnes while the supply was 11.65 million tonnes, a deficit of 280,000 tonnes. However, this deficit is expected to vanish in view of weak demand from China, which accounts for 40 per cent global demand.

This year till August 31, copper prices declined 1.10 per cent to $7,576 per tonne on the London Metal Exchange (LME). But in India, the falling rupee supported the metal, which rose 4.61 per cent to Rs 422 per kg from January 1 to August 31 on the MCX.

Dharmesh Bhatia, associate vice president, research, Kotak Commodities, says, "I feel economic growth and money supply can trigger a rise in copper prices internationally. If the rupee falls further, the domestic price can rise faster, and the metal can trade in the range of Rs 400-470 per kg."

Aluminium:

Between mid-August and September 22, prices rose 12.4 per cent on the MCX, as against a 4 per cent fall this year till August 14.

Mathur of Angel Broking says, "Stimulus packages have supported sentiment of late. The other reason for the upsurge could be China's approval to infrastructure projects. Aluminium is likely to trade with an upward bias for a few more months. On the MCX, strong support is expected at Rs 65-85 per kg and resistance at Rs 125-145 per kg." On September 22, it was trading at Rs 112 per kg on the MCX.

A World Bureau of Metal Statistics report has forecast that consumption of primary aluminum in 2012 will be 44.3 million tonnes compared to 42.4 million tonnes last year. Production is forecast at 46.5 million tonnes compared to 44.4 million tonnes in 2011.

Iron Ore:

As against the rally in other industrial metals, which started in the middle of August, iron ore prices started rising from September 6. Helped by shortage due to regulatory issues and pick-up in demand from steel companies, prices rose 19 per cent to Rs 5,175 per dry metric tonne (dmt) between September 6 and September 22. This year, till September 5, there was a 32 per cent fall to Rs 4,388 dmt.

"A clampdown on mining, for reasons such as illegal mining and damage to the environment, lowered the 2011-12 output by 18 per cent. The recent Goa government's ban on iron-ore mining is likely to lower production in 2012-13 as well," says DK Aggarwal, chairman and managing director, SMC Investments and Advisors.

The Goa ban is likely to lower the 2012-13 domestic production to 140 million tonnes, down 18 per cent from 170 million tonnes in 2011-12.

Fines account for 55-60 per cent of India's iron ore production. The balance is in the form of lumps. The domestic industry consumes 90 per cent of the lumps produced while a large proportion of fines is exported.

"Iron ore prices will stay in the range of Rs 4,800-5,650 per dmt in 2012-13. Domestic demand and regulatory bottlenecks along with government policies will give direction to the market. Prices in major producing countries such as Australia, South Africa and Brazil will also influence the market," says Aggarwal.

Zinc:

Prices rose 2 per cent till August 14 this year. After that, there was an 11 per cent rise to Rs 113 per kg till September 22.

The global refined zinc market had a surplus of 1,35,000 tonnes in the first seven months of 2012. The gap was smaller than the 2,74,000 tonnes surplus in the year-ago period. In the January to July period, the production of refined zinc was 7.39 million tonnes, while consumption was 7.25 million tonnes.

11 per cent
is the return given by the seven industrial metals on the MCX between August 16 and September 22.

Praveen Singh, research analyst, Sharekhan Commodities, says the metal is likely to be one of the best performers in the next two years.

"The zinc market is likely to move into a deficit by 2015. The metal can rise to $2,500 per tonne in the next two years if the global economy does not face another major recession. Thus, we are looking at a 20-25 per cent rise from the current levels. However, no major change is expected in the next six months," he says.

On September 28, the metal was trading at Rs 110 per kg in the domestic market.

Nitin Nachnani, research analyst, Geojit Comtrade, says, "Technically, prices have given a symmetrical triangle pattern breakout and we expect that this breakout could push prices to Rs 123 per kg and Rs 134 per kg on the MCX."

Nickel:

Between August 16 and September 22, nickel rose from $15,300 per tonne to $18,175 per tonne on the LME.

Aurobinda Prasad, head, commodities research, Karvy Comtrade, says, "Overall, the supply of nickel has grown at a fairer rate than the demand. The market is likely to remain in surplus, as supply is rising 4.99 per cent compared to the 4.05 per cent growth in demand."

Nickel has been in excess supply for a while and hence any optimism about consumption will trigger a rise in prices. Further, global manufacturing is improving after bottoming out in June-July.

Prasad of Karvy says, "The metal is likely to continue rising in the short term. More optimism in the fourth quarter of 2012 and pick-up in manufacturing, coupled with hope of a rebound in demand from the major economies, may support prices. We recommend longterm positional traders to buy on dips as the recent weakness in the steel sector and iron ore prices is likely to change by the end of March 2013."

Tin:

The metal has risen 14 per cent from the middle of August till September 22. However, it has declined 20 per cent from this year's high in February on concerns that slowdown in the US, China and Europe will curb demand for the metal, used in cans, televisions and smart phones. On September 28, it was at Rs 1,141 per kg.

Experts are bullish on the metal. Sudip Bandyopadhyay, managing director and chief executive officer, Destimoney Securities, says, "In the short term, there can be a small correction of 5 per cent from the present levels, but the overall view for next five-six months is bullish. So, anytime during such a correction, tin is a good buy for a 10 per cent rally. There is a possibility that it may break the level of Rs 1,300 per kg in the next five to six months."

There is another reason experts are predicting a rally. Indonesia, the world's biggest exporter of the metal, has pulled the plug on 70 per cent tin-smelting capacity.

Lead:

Buoyed by higher demand for batteries, the price of lead rose 21 per cent to Rs 122 per kg in the one month to September 22.

According to data from the National Bureau of Statistics, lead production in China rose 8.9 per cent to 2.68 million tonnes in the first seven months of the year. China's lead acid battery production rose 45 per cent year-onyear in July and 25 per cent on a year-to-date basis. In China, around 70 per cent demand is accounted for by battery production. For instance, electric-bike production there rose 45 per cent year-on-year in July and 22 per cent in 2012.

Quote

The rally in industrial metals is driven by stimulus packages and the Chinese government's approval to a multi-billion dollar infrastructure programme.

KISHORE NARNE

Senior Vice President and Head, Commodity and Currency Research, Anand Rathi Financial Services

Sugandha Sachdeva, in-charge, metals, energy and currency research, Religare Broking, says, "In Europe, the demand for car batteries increased in September, which boosted prices in domestic as well as global markets."

The global market had a 49,000-tonne surplus in the first seven months of the year, according to the Lisbonbased International Lead and Zinc Study Group.

Lead prices consolidated for many months at the start of the year. The metal got a strong cushion at the Rs 99 per kg mark. Prices fell but did show inertia at the Rs 115 per kg mark throughout the year. September, however, witnessed a convincing breakout above the Rs 115 per kg mark, an indication that prices are expected to rise further during the rest of the financial year.

"Going forward, MCX prices are facing resistance at Rs 125 per kg, and a crossover of the same will imply a farreaching switch towards Rs 140 per kg and then Rs 150 per kg towards the end of the financial year," says Sachdeva of Religare Broking.


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