Base metals hit multi year low on Chinese demand concerns

Yuan devaluation to make metal imports into China dearer

Base metals hit multi-year lows on the London Metal Exchange (LME) due to heightening risk of a demand slowdown from China, the world’s largest producer and consumer. The recent devaluation of the Chinese yuan will make base metals’ costlier and poses a risk to their imports into China.

Copper slipped below the psychological barrier of $5,000 a tonne before recovering to settle at $5,007 on Wednesday. The metal had touched this level last in July 2009 following the crash in financial markets after the collapse of Lehman Brothers.

Metals are falling in anticipation of falling consumption and swelling supply as global producers have not announced any major output cuts despite incurring losses at prevailing prices. Oversupply of most base metals is likely, resulting in a further fall in prices.

“China is the primary factor contributing to base metals’ fall. The last stimulus by the Chinese government pulled back markets. Then the  devaluation followed. More than China’s weakening economy, the devaluation of the yuan pressured metals,” said Gnanasekar Thiagarajan, director, Commtrendz Research.

Following copper, aluminium prices also fell to $1,522, their lowest level since June 2009. Aluminium has declined 17 per cent this year. Zinc and nickel also settled at $1,776 a tonne and $10,330 a tonne on the LME, their lowest levels since August 2012 and April 2009, respectively. While copper reported a 21 per cent decline, zinc and nickel have plunged 18 per cent and 31 per cent, respectively, in 2015.

Barclays Capital said in a report there was a growing risk that copper prices would fall further because of a Chinese hard landing. Its baseline scenario was for China’s growth to slow to 6.8 per cent and copper consumption to ease to 4 per cent.

Oversupply remains a concern for most base metals. Production outstripped copper demand by 151,000 tonnes between January and June, the World Bureau of Metal Statistics said. The global market surplus in aluminum this year is estimated at 325,000 tonnes.

"Base metals are facing tough times as China has devalued its currency by 1.9 per cent in a desperate attempt to spur exports, which plunged more than 8 per cent in July. This is the most significant downward adjustment to the yuan since 1994 and indicates that Chinese authorities are concerned about an economic slowdown in the world’s largest consumer of base metals. This step is also in line with one of the Chinese government's main objectives of making the yuan a reserve currency,” said Naveen Mathur, associate director (commodities and currencies), Angel Commodities Broking.

The dollar’s strength  on anticipation of a rate hike by the Federal Reserve has been weighing on prices for some time. “However, some respite can be expected for dollar-denominated base metals as policymakers at the US central bank said conditions had not been achieved yet for the first policy tightening in nearly 10 years. This has fanned expectations of a delay in the rate hike to the very end of 2015," Mathur added.

Emkay Commotrade forecasts aluminium prices to remain under pressure owing to a deluge of exports from top producer China, creating a global glut of the metal used in transport and packaging.