Contrary to the disruption caused by Covid-19, the base metals started moving in positive mode. Generally, the base metals are highly correlated to the economic performance and prices move in tandem with industrial activity. For instance, copper prices rose from Rs411 on May 1 to over Rs524 on Monday (September 14). For the year-to-date price rise this year 2020 so far, copper led the base metals in terms of returns as the economic barometer rose 20 per cent followed by aluminium with 6.5 per cent, Lead with 4.5 per cent, zinc with 10 per cent and Nickel with over 10 per cent.
Before March, the non-ferrous metals descended on failed tie-up between US and China, slowdown in demand and due to pandemic Covid-19. But later on, with announcements on massive stimulus packages never seen in the past, lower dollar index, tightness on supply side due to halt in mining supply for lockdown worldwide and some early green shoots are some major reasons behind the rally in base metals during past four months, according to a latest report by SMC Global Securities.
The positive talk between US and China trade talk and buoyancy in equity market also painted a rosy picture for the base metals. The most important factor was that China was quite active on manufacturing side to support their industry and to take the opportunity of less input cost of base metals as lower crude prices cut the input cost significantly. A simultaneous fall in Shanghai Futures Exchange (SHFE) inventory and a rise in refined metal imports supported the rapid recovery story in China.
In between, the improvement seen in PMI data across the globe which pushed up the prices owing to its positive correlation with industrial metals prices. Apart from PMI, housing data, retail sales, etc., improved. It pushed up prices further in upside. China’s auto sales have posted four straight months of year-over-year gains. The streak followed weak sales in March, when they fell 43.3 per cent year-over-year.
Copper: It has given almost 20 per cent return in 2020 so far and more than five per cent in the month of August. Copper futures (Sept 30 expiry) contracts were trading at Rs527.45/kg on MCX on Monday, while spot price was at Rs525.90 per kg.
Ravinder Kumar, research associate (commodities) at SMC Global Securities Ltd, said: “Copper futures at the MCX platform were settled little higher at Rs521.50 on the previous week. For the last couple of weeks, copper prices are trading higher from Rs495.50 levels to Rs531 and now the prices are in some relaxation mode. Copper prices traded above the trend line of Rs509 and also are trading above the 50-EMA daily support levels of Rs505. The immediate resistance Rs524 may act as a trend interrupting point. Overall the commodity is expected to move higher from its recent support level of Rs505. If it breaks and sustain above the immediate resistance line of Rs524, we can see further upside move towards Rs545/560 levels in coming weeks. On other side, if prices will success to breach the support level of Rs505 then can see the further downside movement towards Rs495/490.”
Copper is the leading metal of the counter and known as Phd in Economics; and it behaved in same manner in 2020 so far. It gave the highest return among all major base metals. Some reason behind its extraordinary journey is manufacturing activities in China, stimulus, lower dollar index, tighter mining supply, lower stocks in LME ware house etc. Strong construction and infrastructure activities, buoyed by the Chinese government’s stimulus programs as well as a recovery in domestic consumption have fueled copper demand in the world’s second biggest economy. Copper miners are struggling globally with the ongoing disruption of the coronavirus pandemic, while in Chile they are also facing a combination of declining ore grades and costly overhauls of ageing mines. In 2020, mine output is expected to decrease by four per cent to 19.65 million tonnes. Global copper demand is forecast to drop 5.4 per cent to 22.625 million tonnes in 2020.
Aluminum: Aluminium futures contracts (Sept 30 expiry) were trading at Rs145.09/kg on MCX, while spot price was trading at Rs148.35 in Pune market.
“It has given almost 6.5 per cent return in 2020 so far and more than 3.5 per cent in August. Aluminum caught up the rally late on a stronger market recovery in China. Destocking in 2Q20 was mostly driven by a pick-up in overall construction activity in the country, aided by supply reduction as smelters suspended their production. Upside in crude prices also supported aluminum prices on higher side. The aluminium tides turned for the People’s Republic of China in July, as the nation became a net importer of aluminium for the first time in almost 11 years. China’s July aluminium imports leapt nearly sevenfold year-on-year to their second-highest level on record. The reversal in the flow of aluminum is the result of a price arbitrage that made importing the raw metal more affordable than buying from domestic producers. China imported 816,592 metric tons of aluminum, up 219.2% year on year for the first half of the 2020. In June alone, China imported 490% more than a year ago, reaching an 11-year high. With tens of thousands of homes and businesses destroyed after Beirut explosion the need for building materials -especially glass and aluminium - has gone through the roof. The coronavirus crisis is creating more demand for aluminum as lockdowns accelerate demand for packaged food and drinks.”
Lead: This year so far, it gained by more than 4.5 per cent and closed to two per cent higher in August. There have been concerns on the supply-side which acted a factor to provide support to this base metal (often co-mined with zinc).
“This upsurge was despite a massive surge in LME inventory arriving in last July, nearly doubling stock levels to 119,000 metric tons. Lead mine production declines in China, India and Kazakhstan contributed to a 3.4 per cent decline drop in global lead mine output. Whether China can soak up that kind of surplus remains to be seen. While much uncertainty remains about the ongoing impact on supply, the case for scarcity and, therefore, support for prices seems stronger for copper than for zinc and lead, despite all of them benefitting from supply-side worries.”
Zinc: It has given almost 9.5 per cent return in 2020 so far and more than 6.5 per cent in in the month of August. Zinc ticks the construction and infrastructure boxes in the form of galvanized steel. China’s refined zinc imports have started picking up over the last two months. June imports totaled 64,700 metric tons, the highest monthly total since August 2019.Imports of zinc concentrates, by contrast, fell 40% month over month to 213,000 tons. Dropping concentrate imports supports the narrative of lower availability from countries such as Peru, where production has been hit hard by quarantine measures. Rising LME inventory suggests demand outside of China remains subdued. Overall, according to the ILZSG, the global zinc market was in surplus by 239,000 tons in Q1, while inventories increased by 156,000 tons. At present it is gaining momentum on aggressive manufacturing of stainless steel and refined zinc in China.
Nickel: It has given almost 10.35% return in 2020 so far and more than 9% in in the month of August. The upsurge in this base metal surprised the whole world owing to a potential tightness in supply as Indonesian ore exports remain banned by the government and may not be fully replaced by other nickel suppliers.
Nickel content of ores extracted by miners in the Philippines, the world’s biggest exporter of the material, dropped 28% year-on-year to 102,310 tonnes in the first half of 2020. During the first half of 2020, mining and refining facilities for nickel were disrupted at a global scale, from the Philippines to Canada, as a result of coronavirus containment measures. Stainless steel will continue to dominate the demand side of the nickel market throughout the decade.
One big project by Elon Musk of Tesla is on the way and it urged that it will give a giant contract for a long period of time if miners mine nickel efficiently and in an environmentally sensitive way, it may prove as game changer if it happens. The performance of the Indonesian high-pressure acid leach projects as they should get close to commencing production may have significant impact on the prices.
Conclusion: A series of upbeat economic data released this month from top consumer China supported prices, with rising auto sales and factory activity suggesting that the economy was recovering from coronavirus-driven lows.
“Improvement in PMI, retail sales, housing sales etc amid massive stimulus may continue to give support to the base metals to trade in upper zone. Nevertheless nickel, copper and zinc have rallied too high and it would be prudent to buy at dip for better risk reward ratio whereas lead and aluminum may continue their upward journey,” remarked Kumar.
The writer is a business journalist with 27 years of experience