Copper no longer metals' bellwether

Price moves in isolation, follows Chinese economy now as against global economies earlier

Copper has got delinked from other base metals. Unlike earlier when it would determine the direction for other metals such as aluminium, lead, nickel and zinc, the red metal is moving in isolation, irrespective of the fundamentals in downstream industries.

Its price on the London Metal Exchange (LME) has fallen due to the metal’s entry into surplus territory this year. Other metals have moved up. Since February 1, copper’s price fell by 6.5 per cent. In contrast, aluminium, nickel and zinc rose 9.2 per cent, 26.1 per cent and 3.6 per cent, respectively. Lead has been almost range-bound in the past 10 weeks. “Copper has seen a clear delinking with the rest of the metals in the quarter and is no longer a bellwether for base metals, due to a drastic change in fundamentals,” said Kunal Shah, head, Nirmal Bang Commodities.

The International Copper Study Group has forecast copper mine production to remain higher by 4.7 per cent to 19.3 million tonnes in 2014. This has raised prospects for higher treatment and refining charges (Tc/Rc) for Indian smelters, including Hindalco Industries and Sesa Sterlite. In fact, Chinese smelters have signed at $110/tonne and 11 cents/lb as Tc/Rc with global miners for the first half of 2014, as compared to $100/tonne and 10 cents/lb in the second half and $70/tonne and seven cents/lb in the first half of 2013.

Copper, one of the leading indicators of global economic health, is the worst performer among metals this year. Various macro economic influences are responsible — Chinese credit tightening concerns, Russia- Ukrainian tensions, sluggish Japanese data, mixed US data, muted demand in China and an overall slide in industrial commodities. Copper fell to $6,380 a tonne before recovering a bit to trade on Wednesday at $6,589 a tonne.

“Copper was truly reflecting growth or decline in global economic sentiment. But, its focus has shifted to China of late. In the past few months, copper has reflected only Chinese economic moves. Ongoing pain in the Chinese economy pulled down copper prices, while other metals showed strength,” said Navneet Damani, analyst with Motilal Oswal Commodities Broker.

The benchmark Shanghai and LME copper prices have been falling steadily this year, mostly because of tepid economic growth in China, which accounts for a little more than 40 per cent of global demand. By contrast, aluminium prices on the LME jumped to its highest level in eight months, with a series of capacity cutbacks by top producers. Aluminium is one of the most widely consumed industrial metals and used in the transportation, beverage can and construction industries. The price reached $3,114 a tonne in 2008, shortly before the financial crisis; the building of vast stockpiles, estimated at more than 10 million tonnes, has depressed prices since. Nearly 5.5 mt of those inventories sit in LME-registered facilities.

In 2014, nickel has been the best performer in the base metal quarter on the LME, advancing by 26.1 per cent since February, helped by the new export rules in Indonesia, the world’s biggest supplier of nickel ore. Over the past couple of months, nickel prices on the LME have risen to their highest level in 11 months, on signs that Indonesia’s export ban on unprocessed mineral ore is starting to bite and affect Chinese stockpiles. The fears on the potential for sanctions on Russia have compounded the jitters.

From being the industry plagued by oversupply and high inventories, nickel is seeing a reversal. The only reason for the muted reaction of nickel prices in the wake of the ban is that Indonesia has a history of dropping controversial policies and making last-minute compromises.