Kishore Narne, Associate Director, Head, Commodity & Currency, Motilal Oswal Commodity
The year 2013 has been tumultuous for all industrial metals
. Copper prices cracked to their lowest in two years to $6,602 a tonne in June 2013 and then pulled back towards $7,200-7,500 a tonne. The average London Metal Exchange, or LME, price fell from $8,830 in 2011 to $7,950 in 2012 and $7,360 in 2013. On the MCX, however, prices got support from the falling rupee in the middle of the year
. The rupee touched a low of 68.80 per dollar, taking copper to a life-time high of Rs 512 per kg on the MCX. Of late, prices have been driven by demand-supply scenarios and global sentiment. Macroeconomic developments, including concerns that Fed tapering could start sooner than expected, have remained in the spotlight, driving prices lower. Despite robust mine production, refined copper inventories at the LME and the Comex have declined, tightening the nearby LME spreads and keeping physical market premiums at high levels.
On the bullish side, demand from China is coming back. Also, hope is building for industrial metals due to the recent reforms announced by the Chinese government to boost its economy. China seems to have switched to restocking in May 2013. Pace of restocking is gaining momentum for the last couple of months and a meaningful and sustained pick-up in end-use demand will likely help the restocking activity. On the bearish side, production has been high, and without a modest increase in demand from China, surpluses will keep expanding. The global economy also continues to be recovering slowly. While China is picking up some traction, the US and the euro zone continue to struggle. Industrial metals took a hit with all other commodities after the Fed hinted in June that it was looking to reduce the easy money stimulus, making it the worst month in the year for all industrial metals. At this stage, everyone expected the Fed unwinding to begin in September. However, the Fed delayed the plan after it found that the economic recovery was weaker than it was expecting. On the LME, copper was trading in the $7,300-7,000 range, which was recently broken on Fed announcements. While macroeconomic concerns over Fed tapering and other factors will continue, so will the excess supply. Tight scrap supply and delays in processing of the additional concentrate supply have been contributing to the recent tightness in the refined market. Increasing concentrate availability will keep prices subdued over the next few quarters.
This year, aluminium prices have fallen by 18% until November, backed by oversupply, weak demand and strong economic data denting the view that the Fed will delay tapering its monetary stimulus programme. Production cutbacks have become more and more evident even as new capacity is coming on stream in China. The new LME warehousing rules appear to have left everybody dissatisfied and premiums continue to rise. Plus, there has been a rise in financing activity and addition to LME warehouse stocks. Aluminium will continue to record sizeable surpluses. Prices will remain capped around $2,000-2,090 per tonne.
Nickel has been the weakest in the metals pack this year (it corrected by over 23%). Recently, a pullback was seen towards $14,800, amid growing expectation that the Indonesian ore export ban will curtail Chinese NPI (nickel pig iron) output. However, the move lacked conviction and fundamental backing and, hence, the metal fell to $13,400. New projects continue to lower production guidance for this year, whereas production in the main mines continues to rise, keeping the overall trend up. Global nickel demand will continue to rise backed by increased demand for steel and coordinated growth in most key nations. LME stocks continue to post new record highs. Nickel prices may rise in between but we do not expect such moves to be sustained in the absence of a concerted supply response and a clear reversal of the current uptrend in inventories.
Lead prices have corrected by 15% and of late have been fluctuating between $2,000 and 2,200 per tonne, supported by fundamentals, amid uncertainty about the outlook for the global economy. Chinese demand has grown at a fast pace so far this year, as evidenced by the 12.7% rise in lead-acid battery output over the first nine months of the year. The International Lead and Zinc Study Group expects deficit at the end of the year. It has predicted a market deficit of 39,000 tonnes this year and 82,000 tonnes next year. We remain fairly bullish on prices.
Zinc prices have continued to fluctuate either side of $1,900 per tonne over the last eight months, with oversupply and uncertainty about the global macroeconomic outlook restricting upward moves. Chinese mine production has continued to rise, supported by the ramping up of a number of new projects in the third quarter. With further projects in the pipeline, we expect continued growth going forward. However, production has struggled to grow. Higher premiums in euro zone for 2014 zinc contracts are expected to continue, despite the weakness in demand within the region, due to continued problems for securing material from LME warehouses, tied up in warehousing deals, as well as increasing demand from Asia. We expect zinc to remain in surplus this year and next, which will restrict the extent of any uptrend.
To sum it up, nickel and lead look the best among the metal pack on improved fundamentals, while copper can give surprises mid-way once tapering concerns are done and prices are driven by demandsupply concerns. Aluminium and zinc markets continue to be well supplied and will get the bears in action on any major upside.KISHORE NARNE
Associate Director, Head, Commodity & Currency, Motilal Oswal Commodity