Strong fundamentals to push base metals up in 2013

Lead could perform better than others on improved demand from auto sector, with supplies remaining tight

Base metals are likely to remain bullish in 2013 on better economic prospects in major consuming nations. Hedge funds have already started betting long on base metals amid hopes that China’s economic growth would surpass last year’s level, US leaders will resolve fiscal cliff hurdles and European nations would work together to overcome economic slowdown.

Robin Bhar, an analyst at Societe Generale SA in London, said in a report, “As we go into 2013, we will hopefully have the fiscal cliff resolved and we will look forward to better economic growth out of China. Also, growth in China and the US could make people a lot more bullish than they are at the moment.”

While the short-term fundamentals are bearish at the moment due to oversupply forecast in copper and nickel, the long-term signals are positive.

GAINING GROUND Metal price movement on the London Metal Exchange       (in $/tonne)
Particulars	Dec 21,’12	Dec 30,’11	Chg (%)
Tin	23,350.00	18,950.00	23.22
Lead	2,276.00	1,980.00	14.95
Zinc	2,032.00	1,828.00	11.16
Aluminium	2,035.50	1,970.50	3.3
Copper	7,768.50	7,554.00	2.84
Nickel	17,385.00	18,280.00	-4.9
Source:London Metal Exchange

In December, hedge funds turned suddenly bullish after betting on lower prices earlier on strong data signals from the US to China. Since the central bank of the US pledged more actions, economies are expected to turn a lot more favourable next year. Also, the World Bank said in a recent report that East Asia’s emerging nations will accelerate next year as China rebounds from seven consecutive quarters of slowing growth. The country accounts for about 40 per cent of global copper demand. According to reports, hedge funds and other large speculators raised their net- long position by 64 per cent to 22,123 contracts in the first fortnight of this month.

The World Bank forecast China’s economy to accelerate to 8.4 per cent in 2013 from 7.9 per cent this year. US industrial production jumped the most in two years in November and the number of building permits rose to a four-year high. The euro zone has also indicated some positive economic growth going forward which may help base metals demand in the long term.

The Bank of Japan expanded its asset-purchase programme for the third time in four months, boosting the asset-purchase fund by 15 per cent to 76 trillion yen ($906 billion). The Federal Reserve added to its stimulus programme by making another $45 billion of monthly treasury purchases. Meanwhile, the US leaders have yet to reach an agreement on how to avoid more than $600 billion of tax increases and spending cuts that start automatically next month.

In a similar response, Naveen Mathur, associate director of Angel Broking, said, “Base metals pack is expected to remain firm as efforts by the key consuming nations to boost the economy may increase demand, thereby, supporting an upside in the base metals. Infrastructure spending announcement by the Chinese government, stimulus measures by the US Federal Reserve as well as Bank of Japan, expectation of resolution of the fiscal cliff issue by the US law makers and constructive efforts by the European Central bank officials to bring the debt laden nation to the growth trajectory, all these factors are expected to revive demand for the base metals.”

Specifically, lead might perform better than other base metals due to improved demand from the automotive sectors with the supplies of the metal remaining tight. Infrastructure spending in China might support an upside in the zinc prices, Mathur added.

Copper, the leader of the base metals pack witnessed mild strength during the year. Copper prices on LME remained firm in early months of 2012, but strength in the metal were overshadowed by the debt concerns of the Euro zone and stunted growth in the key consuming nations.

The other factor supporting an upside in copper prices was weakness in the US Dollar Index during January and February, along with the decline in the copper inventories. The commodity is currently trading with a positive bias due to reports of recovery of economic growth in the key consuming nations particularly US and China.

On the other hand, lead and zinc have posted robust gains year till date. Lead is currently trading around $2,312 a tonne, up 11 per cent while zinc is trading around $2,071 a tonne, up 10 per cent year till date.

Nickel prices have registered losses and are currently trading around $17,305 a tonne on LME, down eight per cent year till date. Weak demand amidst sufficient supplies caused prices of nickel to remain lower.