Base metals outlook: Prices could fall marginally, says Kunal Shah

He said even if China's GDP declines in 2017 & 2018, the size of its economy is estimated at $12 tn

During the start of 2016, ‘Chinese slowdown’ was one of the major concerns for the global economy. But, in spite of that bulk commodity, non-ferrous and ferrous metals have rallied sharply. China’s real gross domestic product (GDP) growth in the fourth quarter (Q4) of the calendar year (CY) 2016 was 6.8 per cent against an expectation of 6.7 per cent. Its full year GDP growth for 2016 was 6.7 per cent, down from 6.9 per cent in 2015 but base metals witnessed a humongous bull run. 

More than demand, I think, production cuts and construction spending were two main factors behind the massive run-up in metal prices. China’s credit expanded strongly in 2016, with new aggregate financing totalling RMB 17.7 trillion (an increase of 15 per cent from 2015). This was the largest expansion on record. There was strong growth in shadow banking loans during the second half of 2016, after two years of weaker activity due to regulatory pressures. 

During 2016, we have seen stabilisation in China but even if its GDP growth declines during 2017 and 2018, the size of its economy is estimated at $12 trillion. And, an economy with that size growing 6.5–6 per cent is still phenomenal.

During the fourth quarter of 2016, we have seen green shoots of strong global growth in developed and emerging markets. Manufacturing PMI’s in these markets have remained robust. Western central bankers have been focusing on fiscal stimulus and the new US President Donal Trump is also likely to announce infrastructure spending package, which will lead to good demand for base metals. More than demand, we believe production cut backs and mine strikes may trigger further upside during the year. 

In case of copper, Chile, which is supplying more than 30 per cent, will see a number of labour contracts expire during 2017. Chile’s largest copper mine Escondida’s agreement with labour union expires on January 31. So, though production is moving up, copper should get support from supply side shocks. Last year, production cuts by big miners have helped copper show magnificent performance during the last quarter of 2016. 

Even in case of zinc, global refined zinc metal production over the first 11 months of 2016 was at the same level year-on-year, with increases in China and South Korea offset by reductions in Australia, India, Japan, Mexico and the US. In last 10 years, geologists across the globe haven’t been able to find any big zinc deposit, precisely the main reason behind the massive bullrun in the metal. 

In case of aluminium, we have seen stronger premium in Japan. China produces more than 50 per cent of global aluminium but due to massive smog problems, production in Henan, Hebei, Shandong and Shanxi has been impacted. If production cuts are aggressive, then prices can shoot up. 

In case of nickel, more supply from Indonesia is expected due to ban on exports of ore and concentrate from January 2017. The new regulations announced on January 12 allow exports of nickel ore under certain conditions but we are very optimistic from the demand point of view. 

On account of Chinese Lunar New Year, we may see some profit-taking in base metals but till China’s construction spending remains robust. We remain positive on the outlook of base metals and believe any correction will provide excellent opportunity to go long. 

The author is head of commodities research, Nirmal Bang Commodities