Base metals may dip on slowing demand

Base metals are likely to remain under pressure this week as the global economic slowdown cuts demand, resulting in a huge build-up of inventories in the benchmark London Metal Exchange-registered warehouses.

According to an observation by the International Monetary Fund (IMF), the world economy will record a growth of 0.5 per cent this year, the weakest in recent years. The United Nation has put a forecast of 1 per cent growth in the global economy in 2009 as against an estimated 2.5 per cent in the previous year. Last week, the US Federal Reserve officials warned of a prolonged global economic slowdown that may push the world’s largest economy US to the brink of deflation.

According to figures released last Friday by the US Department of Commerce, the GDP of the United States dropped 3.8 per cent in the fourth quarter, its biggest drop since 1982. In comparison, the previous quarter witnessed a contraction of just 0.5 per cent.

The demand of non-ferrous metals being closely linked to the economy may decline with the weakening sentiment in the world economy. Currently, base metals in the spot market are traded at a discount to forward contracts. This indicates that the demand for metals will slow in the days ahead,” said Kishore Narne, head (research) of Anand Rathi.

Despite severe production cuts by leading producers of these metals, the inventory is piling up. Copper inventory soared 5 per cent on Friday, its biggest daily gain since September 5, to 477,675 tonnes, and the highest total since November 2003. Aluminium stockpiles have surged to an all-time high of over 2.9 million tonnes.

“More worrying is the regional demand. Japan, for example, never used to have additional aluminium output to deposit in warehouses. But, the country has added 350 tonnes in the last three days which implies that the metal is going to face hard times ahead,” said Narne.

The prices of copper had plunged over 60 per cent since June 30 as the cooling global economy reduced demand, supplies have gone up. The industrial metals are in for a period of time when production will have to remain at fairly low levels as demand falls, an analyst said. Meanwhile, copper declined 3.76 per cent to close at $3,139. Nickel ended the week with a decline of 4.55 per cent at $11,269, while zinc weakened by 7 per cent at $1,084.