Rising dollar, exiting funds may dent metals

MARKET OUTLOOK

Zinc and nickel are set for a short-term rally, but may sink on apprehension of fundamentals forcing investors to pull back from the market.

Generally, investors start offloading their underlying in other asset classes to invest in the US currency, if it moves up. The dollar is currently quoting near a two-month high at 40.76 against the rupee.

After an initial, short-term rally of $200 in copper, $2,500 in nickel and $250 in zinc, these metals are expected to slip to $7,200, $28,500 and $2,700 a tonne respectively. At the kerb close in London last Friday, copper was quoted at $8,578, aluminium $2,880, nickel $28,400 and zinc $2,185 a tonne.

"Overall, the trend is bearish as issues like a strike threat on Codelco's two mines in Chile and supply reduction from Mexico get sorted out sooner or later. The real issues currently evolving are the sustenance of strength in the dollar," said Jayant Manglik, head, commodities, Religare Enterprises.

A strike threat on one of the three Codelco mines in Chile has been resolved, with striking workers agreeing to come back to work probably on Monday. The company has engaged mine workers at two other mines and the management is hopeful to sort out the differences very soon.

Base metal prices remained volatile in the last few weeks on a huge demand building up from developing countries and supplies restricted from mining and smelting ones.

Apparently, the Chinese demand, which dominated the world prices so far, has slowed down. Besides, the US Federal Reserve's decision to raise liquidity in the market is also likely to depress investors' sentiment in coming weeks.

Canceled warrants, a situation where sellers do not want to deposit their stocks in LME-registered warehouses, of copper at a six-month low indicate that red metal producers anticipate a lacklustre demand in the near future, said Navneet Damani, a base metals analyst at Anandrathi Commodities.

He, however, sees base metals moving in tandem with other asset classes, including energy and precious metals in weeks ahead.

Most importantly, the copper premium is hovering around $130 a tonne between Europe's physical market and the London Metal Exchange (LME), a rise from $70-90 a tonne over a couple of months ago.

"This is the highest level of premium copper has witnessed so far in the last visible years. This will open a good arbitrage opportunity in the reverse direction," said Damani.

Meanwhile, a two-day break as a result of the Labour Day in the Shanghai Futures Exchange and LME closing on Monday on the occasion of the Early May Bank Holiday, has led to traders and arbitrageurs booking their positions afresh, leading to copper firming up from last Friday from the intraday low of $8,150 a tonne. Copper is still up almost 30 per cent this year.

On MCX, copper for near-month delivery closed range-bound on Saturday at Rs 340.60 a kg, while aluminium ended the week at Rs 117.90 a kg. Lead closed the week at Rs 104.60 a kg, nickel at Rs 1,153 a kg and zinc at Rs 89.30 a kg.

In the spot Mumbai market, almost all metals declined marginally by 1 per cent each, with zinc slabs ending at Rs 113 and nickel cathode at Rs 1,355 a kg.