More pain before gain for base metals in 2016

Prices decline upto 42% in 2015, to remain subdued in first half before production cuts prove helpful in H2

Base metals are likely to remain under tremendous pressure in 2016 due to dwindling global demand, following a slowdown in the offtake from China, the world’s largest consumer. The impact of production cut, however, may help rebound in their prices in the second half after a subdued price trend in the first half of 2016.

The year 2015 was very painful for base metals quarter with their prices came crashing. Led by nickel, base metals reported up to 42 per cent decline in their prices in 2015. So, the networth of traders declined proportionately, resulting into panic in base metals’ segment.

As United States’ economy passed through several ups and downs with deferments of the US Fed’s scheduled interest rate hikes, traders were skeptical over large positions in base metals. While their existing stockholding accruing losses due to consistent fall in prices, several traders disposed of their inventory into the market.

“In 2016, commodity markets are expected to maintain their bearish trend, as the Federal Reserve has indicated that, it is anticipating four rate increases next year. The markets are, however, expecting something different and the Fed funds futures currently suggests there’ll be just two hikes, in June and December.

The first quarter of 2016 may be slightly beneficial for commodities, as the Federal Reserve observes the effects of the rate hike on the US economy  and is not expected to hike rates during that period,” said Gnanasekar Thiagarajan, Director, Commtrendz Research.

Following the decline in its economy, China has taken enough measures so far by cutting interest rates and artificially depreciating the currency and so on, but its impact is yet to show a desired result on ground. Due to falling prices and more so the reversal is far in sight, primary producers have cut production. Started Glencore’s 0.5 million tonnes, the base metal production cuts spilled over into China also with major producers there are expected to cut over 2 million tonnes of copper output in 2016 in addition to similar cuts announced for other metals. Experts believe, China’s accumulative metal output and consumption would be much lower in 2016 than last year.

Meanwhile, US Fed started raising interest rates with first trench of 0.25 percentage point was announced in December with expectations of four such raise to follow in 2016.

The US Fed chair Janet Yellen in December 2015 said that she would review the actual impact before the next interest rate rise. Markets fear that the interest rate hike may raise inflation which would sufficient for the US Fed to hold back next such move.

“More than the actual interest rate rise, the tone of US Fed speech presents a gloomy picture for base metals in 2016. But, we estimate bearish trend to continue in the first half with a rebound to follow in the period between July – December 2016,” said Jayant Manglik, President (Retail Distribution), Religare Securities.

The broader economic slowdown impacted demand in a big way, but more important has been the inventory overhang that might continue to weigh on prices going for-ward. Meanwhile, China's Nonferrous Metals Industry Association (CNIA) has said that the producers have pledged not to open any new capacity for at least one year or reo-pen any idled capacity to ease the supply glut.

Along with this, China’s economy is showing early signs of recovery, with government support policies, which may underpin base metals’ prices. However, it is early to seek any turnaround overnight as measures to bust the fatality would take considerable time, as lot of them would be required to treat the demand-supply mismatch.