Base metals to see a sharp uptrend in 2016 following Fed's rate hike

Production cut looms large on metals cos incurring huge losses, fundamentals turn positive

Base metals are likely to see a sharp uptrend on a possible interest rate hike by the US Federal Reserve in December.

Metal prices have declined by up to 42 per cent this year as the economic slowdown in China, the world’s largest consumer, has hit consumption.

Western traders normally square off their positions in December ahead of the New Year and the year-end decline lures Chinese traders into the market.  “There has been a shift in the trading pattern over the last few months. Mining companies are incurring losses and production cuts loom. There will be supply concerns in the New Year, which will drive up metal prices irrespective of the Fed’s decision on interest rates,” said Gnanasekar Thiagarajan, Director, Commtrendz Research.

After Glencore announced in October a 500,000 tonne cut in its annual zinc output, prices shot up before stabilising. Alcoa announced a similar cut in its annual output, which cushioned aluminium prices temporarily.

Nickel has been this year’s biggest loser, with a 42 per cent decline until November 25 to $8,650. Copper, zinc and aluminium, respectively, posted 29 per cent, 28 per cent and 22 per cent declines in 2015. Weak Chinese economic data along with a strong dollar resulted in multi-year lows for base metals last week.

“A dovish Fed will induce price volatility, but a firm economic outlook will lead to a quick reversal and an uptrend in metal prices,” said Jayant Manglik, president, retail distribution, Religare Securities.

Goldman Sachs forecasts an upturn in average metal prices in 2016. It estimates the average nickel price at $10,333 in 2016 and  zinc at $1,700.

A recent report by BNP Paribas expects growth in global metal demand to slow down to 2 per cent in 2015 from 4.5 per cent 2014, but sees it rising to 3 per cent next year.