Industrial commodities on downward move

Industrial commodities remained under severe pressure during financial year 2012-13, amid concern on falling demand due to reduced industrial activity in the wake of the worsening European debt crisis.

Brent crude oil led with a 11.7 per cent decline in price, followed by copper and aluminium. The benchmark energy contract for near-month delivery on the Nymex closed the year at $109.27 a barrel as against $123.81 a barrel at the beginning. Copper was down 10.6 per cent yesterday at $7,582.5 a tonne as against $8,480 a tonne at the beginning of the financial year on April 1, 2012. Aluminium dived 10.3 per cent to close the year at $1,881.5 a tonne from $2,098.5 a tonne at the beginning.

The broad decline in industrial commodities indicates continued downward sentiment in global economies, which led investors to pump fresh money cautiously in industries. Though highly unlikely in the visible future, a turnaround in industrial activities would encourage investors to invest afresh, resulting in renewed demand for commodities. Global investment bank Barclays Capital, however, hopes for a short covering on improving economic conditions.

"Untill risks rescind regarding Cyprus's current banking crisis, alongside political uncertainty in Italy, the upside potential for industrial commodity prices will be limited. On the flip side, given the net short positioning across the complex indicated by the CFTC (Commodity Futures Trading Commission) Comex copper data, showing the largest net short in nearly eight months, the risks of some covering and price support are evident on any positive surprises at a macro level," said Barclays in a recent report.

Copper and aluminium prices have witnessed a heavy beating on account of policy and leadership changes in the top metal consumer, China, a stronger dollar, elevating production, lofty warehouse stocks and fragile global demand. The global market for refined copper is expected to swing to a 281,000-tonne surplus in 2013 from a deficit this year, believes the International Wrought Copper Council, with mine supply growing against a backdrop of tepid demand.

Zinc stockpiles are close to their highest level in two decades. However, consumption might outpace supply of the refined metal by about 100,000 tonnes in 2013, equal to what America consumes in a month, with at least four more years of deficits.

On the other hand, activity from China is showing signs of picking up and the US commitment to its monetary easing policy should feed into more demand for base metals. The latest stance of the US Federal Reserve, to continue with its bond buying programme to stimulate the economy, despite consumer spending, confidence and factory activity all indicating improved growth, supported by modest signs of recovery in mainland China, are all likely to underpin the demand for copper and aluminium.

More, developments in China over the past month have pointed to continued incremental improvement in demand, with the potential to support a modest tightening in domestic fundamentals as we move into April.

"Base metals are still not pointing towards sustainable recovery any time soon. Instead, they are still warning for tough times. What gives us the courage to expect more downside in copper for the intermediate term is the formation of a potential Double Top spotted on the weekly charts which also embraces multiple-complex head and shoulder tops formation, some of which have completed and some are heading towards the breakout levels," said Sugandha Sachdeva, head, research, Religare Commodities.

Meanwhile, a Commerzbank report said the base metals market would keep an eye on port strikes in Chile to see if there was a big impact on global supply. As a result of this strike, mine producers have no alternative means of shipping their products. It remains to be seen whether the strikes have any greater impact on supply in the global market.