Metals fall on Fed's tapering decision

Base metals to rebound, supply fear may hold bullion going forward

The US Federal Reserve’s decision to taper its monthly bond buying programme pulled down base metals and precious metals on Thursday.

Copper hit a nearly three-week low after the Fed trimmed the pace of its monthly asset purchase by $10 billion to $75 bn. Copper in the spot market fell to $7,214 a tonne, while aluminium plunged to $1,784 a tonne.

The Fed assumption is that the US economy is improving and the unemployment would remain in a seven per cent range for now. There would be a review if things do not turn out as assumed.

“The Fed’s tapering of its massive bond buying programme and strength in the dollar index will cause short-term corrections in dollar- denominated commodities such as base metals but the overall trend for the metal complex indicates firm prices. A volatile 2013 saw copper, lead and zinc move up, while nickel and aluminum remained under pressure on weak fundamentals. Going ahead, 2014 could see the global economy recovering and demand for base metals should rise, especially in major consumers US and China. Revival in growth will lead demand for base metals,” said Jayant Manglik, president, retail distribution, Religare Securities.

Zinc and nickel prices should outperform among the base metals, with support from Chinese consumption.

From the start of 2013, copper prices have dropped significantly, as concern over increasing supply, rising inventories and the confusion over the Fed’s tapering decision had held market beliefs.

“The concerns over supply continue to surround copper prices going into next year, keeping these subdued. Adding more strain on prices now is the Fed’s latest tapering decision, as its starts to unwind its extended stimulus which had fuelled the rise of commodity prices. The start of the tapering means less liquid money in the markets which used to be routed to commodities, thus turning down the bullish sentiment. While we have seen some demand picking up from China with a drop in inventories on the LME (London Metal Exchange), the end of the restocking season in China could see demand faltering soon. We expect copper to trade lower in the coming days, especially as we enter the week of festivities across the globe, with less liquidity in the markets,” said Kishore Narne, associate director and head, commodity & currency, Motilal Oswal Commodity Broker.

Copper on the LME is struggling to break above $7,300 and hold, after the recent run-up from $6,910. Most of the positives have been factored in, and a cooling in prices can be seen before the year-end.

Spot gold prices traded on a negative note by 2.6 per cent due to the QE taper. Also, mixed market sentiment, along with a declining trend in SPDR Gold holdings, led to a decline in prices. Spot silver prices slumped by around two per cent, taking cues from a drop in gold and base metals’ prices.

Analysts are concerned about bullion’s current level, at the cost of production. Falling below this will result in miners cutting production, causing a supply problem.