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Base metals hit a four-month high on Friday following seasonal demand and expectations of economic stimulus measures in the world's largest consumer, China. The upsurge is likely to continue in coming months on supportive fundamentals.
Faced with its slowest economic growth since 2009, China plans a $1.1 trillion stimulus to boost its economy and rescue hundreds of dwindling infrastructure projects across sectors from mining to healthcare. The Chinese government launched its first $586 billion economic stimulus in 2008.
Following the investment boost to infrastructure projects, consumption of base metals is expected to rise in coming months. Economic growth in China is likely to change the trade dynamics of base metals.
“Base metals are receiving support from two sides. Apart from fundamentals turning positive, seasonal demand is squeezing surpluses in the sectors like lead. The deficit is widening in copper, zinc and nickel. The overall trend is likely to remain positive in coming months,” said Gnanasekar Thiagarajan, director, Commtrendz Research.
Copper hit a session’s high at $6,375 before settling at $6,362 on Friday. Lead followed suit to touch its highest since September at $2,153 before settling at $2,139. Aluminium hit its highest since December at $1,932 but profit booking pulled it down to $1,919 in the cash segment.
“Copper prices are at or around their highs for the year. As expected, numerous mining companies have seen their first-quarter output affected by a variety of outages. To this we can add expected outages in Zambia in the second quarter after this week’s failure of the country’s electricity grid. After a weak first quarter, Chinese demand appears to be improving, with SHFE stockpiles falling rapidly,” said Nic Brown, head of commodities research at global consultancy Natixis.
“Zinc prices are at their highest since the October-December quarter, as the market contemplates imminent closure of the Century and Lisheen mines in the third quarter. The zinc forward curve has moved from contango towards backwardation,” Brown added.
Nickel prices have been supported by the strike at BHP’s Cerro Matoso mine. With the return of Philippine nickel ore exports, Chinese laterite ore stocks are now beginning to increase, and London Metal Exchange (LME) nickel stockpiles are still rising.
Lead was pushed higher in recent weeks after a large proportion of available LME stocks were withdrawn by a single buyer. “It is arguable that some of the upward momentum in base metal prices may be related to the recent weakness of the dollar. If the US Federal Reserve is correct in thinking that the relapse in the US economy during the first quarter is transitory, any weakness in the dollar may prove to be brief,” Brown added.
Naveen Mathur, associate director (commodities and currencies), Angel Broking, said, “Base metals are trading positive as a string of weak economic data from China had raised hopes of additional stimulus from the biggest consumer. Providing additional support to prices is the recent Federal Open Market Committee (FOMC) statement with the prime factors being maximum employment and a 2 per cent inflation target although it did not rule out any meeting for a policy change. In addition, improvement in Greece situation after reshuffling of Greek teams which are negotiating with creditors is supportive. Moreover, zinc and lead prices are buoyed by significant mine closures including Century mines."
