Select base metals may continue to rally in 2021 over weakening dollar

Zinc, aluminium poised for correction as prices move ahead of fundamentals

With stimulus packages being announced across the globe amid the Covid-19 pandemic, base metals are seen benefiting from the same.
 

Copper, zinc and nickel have been rallying for the last 8 months as a broad-based weakening of the dollar made commodities cheaper for holders of other currencies. Besides, supply constraints from the pandemic-hit Latin American nations provided support to the metals, said brokerages.
 

Recently, the announcements of successful trials of multiple vaccines have also given a sentimental boost to the riskier assets such as crude oil and industrial metals, they said.
 

“We expect copper to cross $7,500 per tonne mark in the next four to five months as demand recovery from China, the world’s largest consumer of copper, has been robust and the stimulus packages announced all over the world by several countries will lend support to prices,” said Sriram Iyer, senior research analyst at Reliance Securities.
 

Currently, copper is hovering at around $7,000 per tonne on the London Metal Exchange (LME).
 

Among the base metals pack, copper is the most liquid metal in terms of trading and usually sets the tone for the other metals. However, this time around, the trend is slightly different.
 

Aluminium, a light-weight metal largely used in beverage cans and automobiles, is expected to witness a price correction due to weak fundamentals.
 

“Prices of aluminium have rallied in the past few days ahead of fundamentals. But the metal is in surplus and this could lead to a correction in the first six months of 2021,” said Navneet Damani, vice president - head, research commodities & currency at Motilal Oswal.
 

China, however, is showing a different trend where higher demand in the region is leading to arbitrage opportunities between the metal traded at the Shanghai and the London Metal Exchange, said brokerages.
 

Aluminium on the LME is at around $1,930 a tonne at present.
 

In the domestic market, Hindalco Industries, National Aluminium Company Limited and Vedanta are three large aluminium players.
 

Nickel, the key metal required in the making of stainless steel is expected to do exceptionally well in 2021, said analysts.

“With new projects in the infrastructure sector increasingly preferring stainless steel over any other material (steel or iron) due to its non-corrosive nature that improves longevity of the project, nickel prices are expected to continue with the uptrend in 2021,” said Damani.
 

Prices of the metal could touch $19,000-19,500 a tonne in 2021 and in fact end 2020 at $17,000 a tonne. Currently, nickel prices are at $15,690.
 

“Demand for electric vehicles is also seen strong from China as the country moves towards green energy. This will also support prices as more charging stations will be needed across country leading to increased demand for nickel,” said an analyst with a local brokerage on condition of anonymity.
 

While Jindal Stainless is the biggest stainless steel producer in the country, other primary producers such as Steel Authority of India (SAIL) also make stainless steel products.
 

Meanwhile, zinc and lead, largely used in construction and batteries, respectively, could see diverse trends.
 

“Zinc is ahead of fundamentals. Prices have run up due to mine shutdowns in March, April and May along with transportation issues during the pandemic. But with market being in surplus of one million tonnes as demand is not strong, a correction is imminent in the metal,” said Damani.

Lead price on the other hand has not moved at all. Both lead and zinc are produced from the same mine. Due to lower demand for vehicles, weak replacement demand for batteries and with the winter season still to kick in the US, demand for the metal has been low.

Nearly, 80-85 per cent of the lead produced goes into the making of batteries.
 

Anil Agarwal-led Hindustan Zinc is the only zinc-lead producer in the country.
 

“The overall supply chain disruption due to the pandemic has led to weak recycling demand for the metal in the last few months,” said another Mumbai-based analyst.
 

Usually, lead and zinc prices move in tandem with a difference of about $200-$250 a tonne. This time, however, the difference has widened to about $750-800, hinting at a correction in one of the metals, which is mostly likely zinc, he said.
 

Currently, zinc prices are hovering around $2,721 a tonne, while lead prices are at $1,951 a tonne on the LME.
 

With the production at mines returning to pre-Covid levels and the dollar index holding well above the 92 level since the last three months, the rally in metal prices is slowing down, Raj Deepak Singh, head – research (commodities) at ICICI Securities, said.
 

Besides, stocks at LME & SHFE registered warehouses have started increasing, which is making it difficult for the prices to continue to rally. Furthermore, lack of clarity on logistical issues for the vaccine distribution is raising concerns for the actual revival of the global economy.
 

“Therefore, we believe non-ferrous metals are due for a 10-15 per cent correction from current levels as a rebound in dollar index will likely put pressure on the metals in the short term,” Singh said.