Base metals bear the brunt of China, Greece debacle

Prices are near six-year low due to broad-based selloff; falling equity market in China and sovereign debt crisis in Greece hit futures demand

The burst of the equity bubble in China and the debt crisis in Greek has pulled down most base metal prices to near a six-year low, due to a broad-based selloff.

Fear of a Greek exit from the euro zone and problems in other European countries like Spain have multiplied concerns on base metals’ future demand. The concerns have aggravated with the steep fall in the equity market in China, the world’s second largest consumer of copper and other base metals.



After a 2.3 per cent decline on Tuesday, spot copper fell one per cent on Wednesday on the benchmark London Metal Exchange, to trade at $5,375 a tonne in the early afternoon, a six-year low. Copper has declined around 16 per cent since its recent peak in January. Other base metals followed suit, with aluminium down three per cent on Wednesday to $1,920 a tonne and nickel by 2.5 per cent to $10,900 a tonne. Both are near a six-year low.

The dollar index has risen by a little more than two per cent since mid-June, as it has been the beneficiary of a fall in other currencies, especially the euro.

“The metals are oversold from a technical point of view and, fundamentally, we don’t think things are that bad in many of the supply-demand balances. Lower prices should trigger some production cutbacks, too, which will help to tighten things further, as will any consumer strategic bargain hunting. What price triggers China’s State Reserve Bureau to buy again? So, we wouldn’t be surprised to see some rebounds in the coming weeks,” said Andrew Cole, principal analyst at the London-based Metal Bulletin Research (MBR).

MBR, however, has denied any revision in its base metals price forecast, this being the start of a new quarter (July–September).

“We have had the crisis in Greece escalating and, on top of that, the equity market collapse in China. Both have sapped risk appetite and seen the dollar benefit as a safe haven, which has put base metals under pressure. In addition, it seems the China equity sell-off has spilled over into the metals by triggering margin calls and unnerving investors about wider implications, as well as raising concerns that the authorities – usually pretty effective in troubleshooting problems its economy encounters – are struggling to control this one,” he added.

Base metals might see some triggers, such as a resolution to the Greek crisis, more effective action from Chinese policy makers to stabilise the rout and shore up sentiment, and even signs that all the turmoil and heightening of risks in the financial markets have turned the US Federal Reserve more dovish, delaying the expected September rate rise.

After falling steeply on Tuesday, gold recovered marginally in London to trade at $1,157 an oz. Silver, however, continued to slide to trade at $15.01 an oz. Also, Brent crude oil was $56.19 a barrel in early Wednesday trade to gradually come closer to $55.10, the weakest level since April 6. US crude was down 57 cents at $51.76 a barrel.

“Gold is languishing around $1,150 an oz. In fact, Greece's uncertainty should have added safe haven demand, which remains absent as of now. It’s more of a cautious trade in gold. China, according to me, is only a growth-related fear, which all other economies may face, and get corrected as well. Greece is more of a fundamental problem with a sovereign debt issue which could take longer time for resolution,” said Gnanasekar Thiagarajan, Director, Commtrendz Research.

Prathamesh Mallya, senior research analyst, Angel Broking, forecasts gold and silver to decline further to $1,100 and $13.9 an ounce. In rupee terms, gold and silver for near-month delivery on the Multi Commodity Exchange might test Rs 25,400 per 10g and Rs 34,280 per kg, respectively.