Weak 2016 awaits precious and base metals

Don't want to miss the best from Business Standard?

Triggered by slowing demand from emerging economies, led by China, prices of industrial and precious metals are likely to decline in 2016.

A World Bank study forecasts a two per cent decline in precious metals, after a seven per cent jump in 2014. The study forecasts nickel would lead base metals' fall this year, with a steep 22 per cent slump on reduced demand and insufficient production cuts.

A base metal is a common metal not considered precious, such as copper, tin, or zinc.

Overall, base metals’ prices are estimated to decline eight per cent this year.

With the US Federal Reserve (US central bank)’s deferral in interest rate rise, investor sentiment reversed towards gold on a weaker dollar, increased macro risks and a rise in safe-haven demand. The adoption of negative interest rates in a number of developed economies increased gold’s attractiveness by reducing its holding costs. Conversely, rising interest rates typically have negative implications for gold prices, as investors seek yield-bearing assets. Weak global demand has also hit base metals so far this year. “Gold prices are projected to fall only one per cent, reflecting strong investment demand in the first quarter but are expected to decline, going forward, on expectations of a rising dollar and tightening in US monetary policy. Other metals in the group, however, would also be dragged down. Physical demand is expected to remain robust in India and China, while mine production continues to benefit from cost reductions,” the study finds.

Data compiled by the World Gold Council estimated a seven per cent increase in investment demand of gold at 878.3 tonnes in 2015 as against 815.4 tonnes in the previous year. Platinum is expected to lead the decline, falling 10 per cent on surplus supply. Silver prices are expected to fall five per cent due to slowing physical demand, as the metal is more vulnerable than gold to shifts in industrial production.

Downside risks to the forecast include stronger-than-expected monetary tightening and dollar strength. Upside risks include weaker global growth, financial stress in key economies, heightened geopolitical events, and stronger demand from consumers, central banks, and investors, the study said. Upside risk is sometimes upside for short. It is the extent to which the value of a security or other investment may increase beyond forecast levels. Downside risk is the opposite. Sizable declines are also expected for iron ore (10 per cent) and copper (nine per cent). Most other metals in this category are expected to fall as markets remain in surplus amid high stocks. Markets are expected to tighten in the medium term due to reduced investment in supply capacity, rising global demand, and some specific factors, including Indonesia’s ore export ban and closure of large zinc mines due to exhaustion.

Slower demand in China and higher than expected production due to further cost reductions might continue to pressurise movement in the steel making raw material. “Upside risks are centred on stronger global demand growth and supply shortfalls from project delays, operational disruptions, falling ore grades, environmental constraints, and greater closure of high-cost capacity,” said the study.

Base metals are also likely go move in line with other non-agricultural commodities. Metal prices fell one per cent in the first quarter, a sixth straight quarterly decline. Expectations of rising demand in China followed strong imports in January and February, and improving macro indicators. Prices were also buoyed by falling stocks, production cuts, and a few supply interruptions. Most markets remain oversupplied, however, with large stocks and lingering uncertainty over demand.

Low prices have curtailed high-cost capacity in China but new capacity continues to come online there and elsewhere. Further closure of high-cost supply is required to bring the market into balance and reduce the large inventory overhang, but restart of idle capacity will continue to be an overhang on the market.