Demand, output cut may fuel base metal prices

MARKET OUTLOOK

Industrial commodities, especially base metals, prices of which have fallen below their production cost, are likely to bounce back this week on favourable economic undertones from developed markets, coupled with a production cut announced by a number of leading producers.

China, the world’s largest metal producer and consumer, has postponed plans to buy industrial metals in overseas markets in anticipation of a further fall in prices as a result of the global economic recession. With the Chinese staying off the market, there is an oversupply of base metals, shrinking their prices. With base metal prices hovering around their respective lows, a further dip looks impossible, said Navneet Damani, a base metals analyst at Anand Rathi, a Mumbai-based commodity broking firm.

As global indices have started recovering, a 10 per cent upside in base metal prices cannot be ruled out. This, however, does not mean that downturn has ended, Damani clarified. As anticipated, the second bailout package by the US government may ease liquidity in the equity market, which may have a repercussion on the industrial commodity market as well.

In contrast, Jayant Manglik, head (commodities), Religare Commodities, feels that the demand for base metals is unlikely to resume so quickly because of a downturn in the housing sector. Hence, unless more companies cut their output on a massive scale and unless supply is restrained, prices may not recover. Immediate announcements of production cuts would take at least three months to have a real impact on the market, he added.

Copper pulled industrial metals deep into the negative territory last week, losing almost 9 per cent as concerns over the global demand triggered a sell-off across commodities. The demand outlook does not look good as there are a lot of economies that are shrinking despite the emerging demand from China, said a Religare Commodities report.

Inventories of copper, used in power and construction, in the London Metal Exchange (LME) warehouses jumped 6,775 tonnes to 230,060 tonnes, the highest level since March 2004.