Base metals plunge on China worry

Copper fell over 3 per cent on the London Metal Exchange (LME) after China’s composite index slumped 7 per cent on Thursday.

Base metals have not recovered after China announced its currency devaluation in August 2015 as the world’s largest consumer of industrial commodities began to slow down. Nickel has plunged 22 per cent on the LME and zinc, copper and aluminium have declined 19 per cent, 11 per cent and 6 per cent, respectively. On Thursday base metals prices declined by up to 1 per cent on fresh turmoil in the Chinese market.

“The ongoing fall in base metals’ prices can be attributed to the fall in the Chinese currency and deflation in the commodities market. Prices of raw materials have not declined as much as finished products, resulting in a stagnating cost of production,” said an analyst with a leading foreign brokerage house.

The depreciating yuan is exerting pressure on exports from China. Chinese producers will continue to dump their produce in global markets, resulting in a downward bias in metal prices this year, according to Macquarie Research.

“The disinflationary cycle has shown little sign of abatement and supply cuts are coming only reluctantly,” said Sumangal Nevatia, an analyst with Macquarie Securities.

A plunge in the US in November has taken the global manufacturing primary manufacturing index (PMI) to its lowest in over two years. Macquarie expects global industrial output to grow 2.2 per cent over 2016, historically a level that results in minimal metal demand growth.

Glencore has announced a 0.5 million tonne cut in zinc output and Malaysia has imposed a three-month ban on bauxite mining. Freeport-McMoRan has announced a cut of 45,000 tonnes of copper in its US operations. Imperial Metal, one of the largest copper producers in Canada, has suspended operations.

The production cuts are, however, not enough to affect supply. Most metals are forecast to remain in deficit in 2016, but analysts believe the price trends will continue until 2018 or till actual supply concerns arise.

“We expect metal prices to remain under pressure, with a deeper and longer base metals downturn,” said Kaustubh Chaubal, vice-president, Moody’s Investors Service.