Base metals to remain up on return of Chinese traders

Lunar New Year holiday ends on Feb 24, global economic recovery and narrowing down surpluses to favour

Prices of base metals are likely to remain up in near term on narrowing supply surpluses and anticipated rise in demand from emerging Asian economies and the United States.

Last week, industrial metals on the London Metal Exchange (LME) moved in a close range, largely because of absence of Chinese traders due to holiday. Copper opened low on Tuesday but gained marginally mid-week to close on Friday at $5,707 — a marginal decline of $24 from previous week's close. Aluminium and other metals in this segment also moved in tandem to close with a marginal decline over the week.

“Base metals complex looks very good. China has very clearly shown to the market that it won’t hesitate to cut interest rate if economy worsens. So, the market will not unduly concerned about the economic data from China from now on because they know China will anyway do something about it. Over and above, the US economic recovery is also underway. So, positive signs are emerging more for base metals. Despite, Euro zone denied extension, markets anticipate Greece would get six months extended time for loan,” said an analyst. Data compiled by Lisbon–based International Copper Study Group (ICSG) showed the world copper surplus narrowed during the first 11 months of 2014 with more growth in consumption than production.

According to ICSG, while refined copper production is estimated to have increased by around eight per cent (1.6 million tonnes) in the first 11 months of 2014, compared with refined copper production in the same period of 2013: primary production increased nine per cent, and secondary production (from scrap) increased three per cent. Between January and November 2014 period, world’s consumption is estimated to have increased 10 per cent (1.9 million tonnes) compared with that in the same period of 2013, supported by strong demand from China and a shortage of high-grade scrap.

Interestingly, Chinese apparent demand increased 17 per cent (1.5 million tonnes) based on a 16 per cent increase in net imports of refined copper. Usage in the United States, however, declined 1.5 per cent.

However, the aluminium production in the last year was over 3 million tonnes. Since, the aluminium market has seen an oversupply for the last several years, another quantum of supply will keep its prices under check.

“Some supply bottlenecks have emerged in the last few months. So, base metals will get support from positive factors with overall global economic recovery, which will certainly be helpful. Historically, base metals move in tandem with stock markets. But, last year was an exception when stock markets kept going up and base metals coming down. Technically also, most of base metals have bottomed out which gives a way for the quarter to remain bullish going forward,” said an analyst.

The Chinese Lunar New Year holidays end on Tuesday. After that volume and volatility are expected to rise. In the meantime, traders may try to take some cues from Saturday's decision by Greece regarding its formal request for a loan extension, or its walking away from the negotiation table and facing the consequences of a probable default.