US auto aid fiasco casts shadow on base metals

MARKET OUTLOOK

Copper may fall this week as slowing industrial output in the US, China and India, the three major consumers of base metals, has revived investors’ fear over declining demand and a deepening global economic crisis.

The US Senate’s rejection of a $14-billion lifeline for embattled auto makers surprised metal traders, who were earlier optimistic about the bailout package. As a major portion of base metals (about 35 per cent) is used in construction and automotive sectors, pessimist investors started whispering about bankruptcy of the two US auto majors, General Motors and Chrysler, which may run out of cash early next year.

Analysts at Angel Broking, however, forecast base metals to remain volatile, with markets entering a profit-booking phase after a bout of buying as seen in this week.

The latest estimates of the US Labor Department indicate that the world’s largest economy cut 533,000 jobs — much worse than the forecast for a reduction of 340,000 jobs — in November, the fastest pace in job cuts in 34 years. The US unemployment rate rose to 6.7 per cent, its highest since 1993, from 6.5 per cent in October. Apparently, Chinese copper demand declined by 5.5 per cent in October from a year earlier.

According to trade sources, China’s industrial output slowed to grow at 7.2 per cent, while the US posted a decline of 0.8 per cent in November compared with that in October. India, too, reported a 0.4 per cent decline in factory output, while the manufacturing sector recorded a fall of 1.2 per cent in October from the comparable month last year.

Each car uses about 1.5 kg of copper. With car companies heading for bankruptcy, copper and other metal producers are bound to face the heat. The use of metals would decline in the months ahead, said an analyst.

Copper fell almost 9 per cent on Friday after gaining over 10 per cent in the first four sessions. But speculators booked profits late on Friday kerb, thereby pushing the price up at the end of trade. Traders hope the market will remain under selling pressure, with hidden inventories heading for LME-registered warehouses.

According to a report by Religare Commodities, a weak demand is set to see inventories continuing to grow in the near future. Overall, copper and aluminium ended the week range-bound at $3,161 and $1,462 respectively, while nickel and lead headed for smart weekly gains on intermittent buying from their consumer industries. Nickel finds application in the stainless steel sector, while a majority of lead produced globally is used in battery manufacturing.

Nickel ended last week with a gain of over 15 per cent at $10,525 a tonne. Lead followed suit and closed at $1,053 tonne, while tin ended the week with a marginal gain of 3 per cent at $11,825 a tonne. Aluminium and other industrial metals are set to follow copper’s lead as expectations have been reinforced that demand growth could turn negative sooner than previously thought.