Base metal rates seen staying high

The rise in base metal prices is likely to continue through the year, according to analysts and traders.

"An average rise of 15 per cent is likely from current prices but one can definitely say that the peak is seemingly behind us now," a Mumbai-based analyst said. More than the supply-demand mismatch, the rise in freight rates account for the increase in base metal prices.

Base metal spot prices dipped 35 per cent on year around April 2005 as most players had built up huge inventories ahead of the price hike expected in the annual long-term contracts.

Market players said China was the largest buyer in the first four months of calendar 2005 to satiate its surging economy and to build infrastructure for Olympics 2008. Apart from inventories, the decline in demand growth of Europe's automobile sector by 4 per cent also sounded bad news for the sector.

With the inventory pile-up around exhaustion levels and Europe's projected automobile sector growth, metal demand is likely to get a fresh impetus. This may lead to supply being unable to meet demand and, thus, push up prices.

More than this, the rise in freight rates is being foreseen. Market players are expecting the four-month positive cycle of global ocean freight rates to begin September and this may push up prices.

Interestingly, bolstered by signs of strengthening demand, freight rates have already extended the expected two weeks rally, which in itself is a strong reason for the price rise.

"Freight rates at times can make up to 50 per cent of the cost, insurance and freight prices of metals. Thus, an increase in freight rates just directly pushes metals prices up," said another analyst.

In case of India, the festival season spells demand and traders are expecting domestic prices to rise in tandem with that on the London Metal Exchange.

A Delhi-based trader Ramesh Aggarwal said, "While we expect prices to rise, it is difficult to give an clear indication four months down the line. We have good orders for September. The whole scenario will be clearer by the month-end."

Traders also say while small blips in price movements may come forth, these will not last for long. As a report by Barclays Capital puts it for copper, "Prices remain vulnerable to the downside, because of large investor interest in selling this market and because of the seasonal slowdown, but fundamentally, downward risk is limited."

Barclays sees the London Metal Exchange 3-month copper contract to find support at $3,450 a tonne. Barclays expressed a similar sentiment with respect to aluminium too.

"While investor attitude toward this market is upbeat, we are more sceptical towards aluminium prices' ability to spike further."

Like all other metals, nickel too is technically overbought and analysts expect a slight correction, while fundamentals indicate an upward movement.