Base metals seem set to end a bearish price phase, with the stage being set for a rally early next year. Since April, most metals had not been doing well, after the American government warned of raising tariffs on commodities imported from China. Tariffs have been raised but China’s demand has not fallen as significantly as had been feared. Analysts are, therefore, turning bullish for metals.
Since April, metals are down by nine to 23 per cent. If considered from the last week of April, when the US first warned of a trade war, especially with China (the largest consumer of metals), the fall in prices is even more. However, analysts say the fundamentals have not been hit as much as feared. China’s demand is still good.
Sandeep Daga, Director at Regsus Consulting, which focuses on metal price risk management, training and research, said: “A strengthening dollar and falling equities are not allowing metals to revert higher, despite improving fundamentals. However, our analysis shows the floor is nearing for metals. Improving sentiment in Chinese equity markets, following several steps taken/promised by the government, investors getting lured to 'undervalued' emerging markets and metal inventories falling to critically low levels suggest the stage is setting up for a spectacular rally in base metals in the months ahead.”
One major reason for metals to stop falling and track fundamentals which are not as bad as feared is that inventories, as measured by the stock with the London Metal Exchange (LME), are falling. In some cases, these are at a multi-year low. In the case of zinc, the combined stock with the LME and at China’s SHFE exchange where metals are traded prominently is below 100,000 tonnes, the lowest since 2006-07. In copper, the stock in terms of the number of weeks of consumption is at a 12-year low. Similarly, aluminium stocks in China were reported at 2.3 million tonnes at the beginning of the year and 1.53 mt at the start of this month, a big fall. It is a similar scene with lead.
China will continue to be a driver of metals in the months and quarters to come. It is importing zinc and lead at a strong pace. Its export of aluminium has started to decline and copper consumption is expected to have risen by eight per cent in the third quarter. Its nickel consumption remains strong, led by 75 per cent growth in electric vehicle sales this year. All these point to better than expected Chinese demand or improved fundamentals.
Going ahead, China’s PMI or manufacturing index should show a turning around and overbought richly valued equities in the US should correct.
Bernard Dahdah, a senior commodity analyst at London-based Natixis, says: “Base metals’ fundamentals have seen an improvement and prices will stay high next year.”