Base metals rebound on physical buying on lows

Concerns of oversupply remain and Fed's interest rate decision may weigh on base metals' future move

Most base metals gained upto 5.7% on bargain hunting due to fresh support from weak sentiment in global equity markets. Renewed support from China prompted traders to book afresh amid expectations of a rebound in equity trade, which got global markets into panic due to consistent fall earlier last week.

Nickel let the entire basket base metals complex with its highest gain of 5.70% at $9,835 a tonne on the benchmark London Metal Exchange (LME). Zinc followed suit and gained 4.95% after steep fall on Monday. On Friday, zinc settled at $1,793 a tonne.

The rebound in base metals complex raised hope for a return of investors towards infrastructure sector. But, global supply surplus continues to pose a threat for its sustainability for long time. Weak sentiment over global economy is likely to weigh on base metals going forward.

“The rebound in price is primarily because of fresh buying on lower price. Traders have booked afresh in the last few days when the price corrected following the recent fall in the global equity markets,” said Gnanasekar Thiagarajan, Research Director, Commtrendz.

Premiums on base metals have come back to one-year high, thus indicating a strong physical buying. As against the level of $50-60 a tonne over a week ago, premiums on copper have surged to the level of $115-130 a tonne over LME prices for Yangshan Copper, China.

On Friday alone, copper for delivery in three months jumped by 0.8% at $5,179 a tonne in early trade. Spot copper, however, settled at $5,095 a tonne.

Base metals are still showing signs of overall weakness on long term basis. Copper price showed a decline of 11% since July, nickel and zinc fell sharply by 16% and 10% respectively since the same time.

“Indications are that the US Fed would delay its decision on interest rate decision. As expected earlier, US Fed may raise interest rate in September. But, the latest release of the minutes of the US Fed meeting indicates the interest rate hike may be extended to December. If that happens, base metals may see a sharp fall again,” said an analyst.

Base metals and dollar move in tandem. Growth in the global economy drives base metals across the world. Hence, the delay in the US interest rate hike may raise concerns of a rebound in the global economic growth which would threaten base metals’ consumption.

“Since the market is already facing supply surplus, base metals may see a sharp fall once US Fed makes clear its policy in interest rate as scheduled in September,” said the analyst.

Meanwhile, zinc gained after Australian officials threatened to close the giant McArthur River zinc mine owned by Glencore. Lead and aluminum also followed suit. Tin was facing a monthly slide of about 12%, its biggest monthly decline in over two years.