Base metals (Copper, Aluminium, Zinc) to recover on robust growth

After a rally towards the end of 2009, base metals have tumbled in the first half of 2010 on China monetary tightening and concerns about sovereign debt problems in Euro Zone nations. Apart from the temporary upward movements seen in copper, nickel and aluminium analysts hold divergent views on prospects for base metals ahead in 2011. Against this backdrop, Atul Shah , Head of Emkay Commotrade, talks to Sreekumar Raghavan of Commodity Online that prospects for base metals in the medium term looks bright on robust economic growth possibilities.

COIL: This month our focus shall be on base metals. Before going into details, what is your quick view on performance of base metals in the first half of 2010 and prospects ahead?

Atul Shah: Prices for base metals rose strongly in the fourth quarter of 2009, although volatile, prices generally moved higher in the first quarter of 2010. Strong Chinese buying and the prospect of restocking in the OECD, where inventories were typically at historical lows, coupled with the positive impact of government stimulus packages on demand supported the rise in prices. Investor interest was also strong.

However, prices were highly volatile in the second quarter, peaking at new recent high in April only to plunge in May and June, in some cases by as much as 20%. Concerns about sovereign credit risk in the euro zone and the uncertain impact of monetary tightening in China drove prices lower. We expect China to remain the primary source of demand growth in 2010-11, but we also expect Chinese demand growth to ease in the second half of the year as a result of government efforts to cool down the property market in particular.

In the medium to longer term, we expect prices for base metals to rise in response to robust growth in the developing world, the fact that the supply profiles for many metals tend to be volatile. Mining output can easily be hampered by inclement weather, energy shortages, transport bottlenecks, union activity or a difficult regulatory environment.

COIL: Copper futures have fallen 10% this year, except for the occasional gains, copper continues to be weak. What could be the reasons? Are the fundamentals supportive of copper?

AS: Copper has suffered a spectacular fall in first half of 2010 as fears of Chinese fiscal tightening and Euro-zone debt woes plague the market. The base metal hit a nine-month low of $6,037.5/tonne on 7th June 2010, it has plunged more than 20% since its peak was $8,043.75 in April. A key driving force behind the sharp fall was the concern of overheating in China, the measures have been taken by the government to dampen the property bubble - a major end user of the metal. China's imports of refined copper were only 212,000 tonne in June down 67,700 tonne from May and down 44.11% YoY.

However in recent days copper has given smart recovery on expectations that the insatiable hunger of China for copper may still help the metal. Falling copper inventory at LME is also supporting the red metal. Global inventory levels, indicated by LME stocks are currently at 411,525 tonnes, lowest since November 2009.

According to the International Copper Study Group 18.5 million tonnes of copper is likely to be produced in 2010, against the demand for 17.9 million tonnes. The 600,000-tonne surplus is expected to be halved in 2011, as demand is expected to outpace supply.

Considering overall fundamentals medium term outlook for copper is positive above $6800/tonne (Rs. 300), however in near term a correction towards $7000/tonne (Rs.320) is expected.

COIL: Aluminium prices have support from the rising automobile sales and dollar weakness with some analysts upbeat about its near to medium terms prospect. Do you subscribe to the view that aluminium can go $2450 per tonne by 2010 end?

AS: The near term prospects for aluminium prices do remain good with rising automobile sales, especially in fast-growing economies like India and China. The relative weakness in the US dollar also positively impacts aluminium prices since a weaker dollar makes the commodity cheaper for holders of other currencies, thus encouraging imports. These short to medium term positive factors could support aluminium prices and a price level of $2300 per tonne could be possible on LME. Only, a further upside break of this level could take prices higher near $2500 per tonne. LME stocks for the metal, used in transport and packaging are currently at 4.4 million tonnes, stocks hit a record high above 4.6 million tonnes in late January 2010.

COIL: Do you have a bullish view on nickel considering the supply disruptions although it has fallen 28% since the high of $19,550? ( it is 27,590)

AS: Concerns about sovereign credit risk in the euro zone and the uncertain impact of monetary tightening in China drove nickel prices lower by almost 35% in June 2010. However, a series of strikes, project delays and production problems have hurt nickel production in recent period. LME inventories have dropped by about 25 percent to five month low at 116,778 tonnes as on 30th July 2010. All these factors are supporting nickel and we expect LME nickel to touch $22,000-23000 in near term.

COIL: Do you think fundamentals related to base metals rather than macro economic and currency concerns will drive the market for base metals for the rest of 2010?

AS : The global economy has been in recovery mode after the financial turmoil faced in 2007-2009 period. Although there has been gradual progress in economic stability in the major growth drivers from the developed world, some macro-economic concerns do remain. The most recent example is the euro-zone debt crisis which is an after-effect of the earlier financial meltdown. The eurozone debt crisis has again raised concerns on the global economic stability and has impacted the euro currency. Such an uncertain environment adversely impacts investor sentiment in the short to medium term. Hence, in our opinion, base metals prices could be driven more by news and events of macro-economic relevance as well as currency concerns rather than the fundamentals related to a particular commodity.

COIL: What is your quick take on Zinc and lead prices?

AS: Technically Zinc is in intermediate uptrend and prices have risen from $1577/tonne in LME (Rs. 74.35) in early June 2010 to $2005/tonne in LME (Rs. 91) on 29th July 2010. It has already given a rise of 20% in less than a 2 months period. Further we expect zinc prices to touch $2200/tonne in LME (Rs. 100) in near term. Zinc and lead normally moves hand in hand so our view is same for lead also. We expect lead to touch $2300/tonne in LME (Rs. 105) in near term.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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