Metals may melt again

MARKET OUTLOOK

Hovering below the cost of production, base metals are likely to move in a close range next week on need-based fresh buying from cable and housing sectors. Many traders, who are awaiting prices to fall further on weak fundamentals from major user countries, including China, the US and the EU, may book their orders at the current price.

Almost all primary metals are currently trading at a 15-20 per cent discount to their production cost because of poor demand from consumer industries. This is unlikely to continue for long as a number of mines have already announced closure because of unviability at the current price. If the price does not recover, others too would close down soon.

“Base metals have bottomed out and there is no room for a further fall,” said a trader. In order to offset losses in equity markets, traders would surely book profits even if the price moves marginally up. Therefore, “the cat and mouse game” will continue for the next three months until physical buying from China picks up, said an Angel Broking report.

The report forecast that base metal prices could test further lows as demand was slowing and inventories were continuously rising. The US dollar index is expected to weaken further, but this may not be able to provide support against the downside as weakness indicates a worsening economic situation in the world’s largest economy. The economic downturn is hurting financial markets across the globe. Hopes are high on the Chinese stimulus package, which could revive the market in 2009.

According to an estimate by London-based Bloomsbury, copper demand may drop 4.1 per cent next year, with consumption in China down 2.6 per cent. US demand for the red metal will fall 6.9 per cent after an 8.7 per cent decline this year. Copper has dropped 56 per cent this year as recession in the US, Germany and Japan reduced demand for the metal and curbed its use in China.

“The recessionary fears forced base metal analysts to forecast the raw materials to remain under pressure during the first quarter of the next calendar year,” said an analyst at Religare Commodities.