Supply worries keep industrial metals under pressure

Chinese smelters restore earlier production cuts; demand continues to remain subdued

Prices of industrial metals declined sharply in May on supply worries, following reports of Chinese smelters restoring earlier production cuts and waning demand from major global economies, including China, the world’s largest consumer.

A strengthening dollar has supported metals’ fall. Bloomberg data showed the price of hot rolled coil steel in the benchmark Chinese market has slumped by 15.9 per cent, to trade currently at $404.81 per tonne. Iron ore's price is down 14.3 per cent in May, to trade currently at $56.78 a tonne.

Many metals’ smelters in China had previously announced a production cut to adjust supply, resulting in a sharp increase in prices. Following the recovery in metals’ prices, these production units restored their output, resulting in a sharp increase in supply, without any change in demand fundamentals.

“Steel supply has increased in the past few months on Chinese mills restoring their production cuts to take advantage of price increase and expansion of spread since February this year. Fundamentals, perhaps, have improved only marginally. With supply outstripping demand, steel prices are retreating as quickly as they went up. The downside from current levels is limited, in our view,”said Sanjay Jain, senior vice-president at Motilal Oswal Securities.

This global decline in prices of industrial metals might not be so in India, as domestic steel mills continue to leverage protectionist measures announced by the government in recent months. To prevent dumping here from China, Japan and Korea, the government announced a minimum import price, plus other preventive measures like a safeguard duty.

  “The domestic price follows international price points. The current domestic steel price, however, is still lower than the import parity price. The spurt last month was primarily on account of a surge in input costs. Steel prices have now been corrected in line with input prices. The price correction has not affected margins or impacted growth in steel demand in any way,” said Vikram Amin, executive director at Essar Steel India.  Following steel, base metals also fell sharply in May, after a spike over the past few months on the benchmark London Metal Exchange mirroring a weak demand trend.

While aluminium declined by 8.3 per cent in May, to trade currently at $1,531.25 a tonne, copper and nickel fell by eight per cent and seven per cent to quote at $4,659 a tonne and $8,755.25 a tonne, respectively. The markets have been worried on reports that many Chinese smelters were reversing production cutbacks after prices rebounded, which would add to a global surplus. Funds appear to have pulled out more money from Chinese markets as exchanges keep up the pressure to control speculative investment and crack down on high-frequency trading.

Copper bounced back last week from a two and a half month low, as optimism over a rebound in US economic growth overshadowed a stronger dollar and a fragile Chinese economy. “A key support level for copper was at $4,590-4,600 a tonne and if the metal held support at that level, it would probably result in a short-covering rally ahead. If that level failed to stem declines, however, copper would be on course to test January lows just above $4,300 a tonne,” said Gnanasekar Thiagarajan, director, Commtrendz.

Many base metals are at a critical level right now but from here on, it is very much data-dependent. More data from top metals consumer China, including industrial production, is due next week. US April retail sales recorded their biggest increase in a year, suggesting the economy is regaining momentum, and US consumer sentiment rose to the highest levels since June last year.