Base metals prices seen slightly up

Global prices of base metals are seen mildly up, courtesy the revaluation of the yuan against the greenback, analysts and traders said.

The currency appreciation, albeit small, could be regarded as a buying opportunity, said a Barclays Capital report, adding that even despite the revaluation, Chinese buying is expected to increase despite "higher-than-desired price levels".

The Chinese currency was revalued 2.1 per cent to 8.11 against the US dollar on Thursday. The yuan is now on float against a basket of currencies. While the Chinese government has not clarified about which all currencies are included in the basket, analysts say the euro and the Japanese yen are most obvious contenders. 
 

Hotting up
LME prices in $ tonne Spot prices
Commodity	1-Jul	21-Jul
Copper	3,510.50	3,692.00
Nickel	14,680.00	14,720.00
Lead	870.00	857.00
Aluminium	1,690.50	1,823.00
Zinc	1,205.00	1,216.50
Tin	7,320.00	7,265.00
Three-month futures contracts
Copper	3,299.00	3,437.00
Nickel	14,535.00	14,305.00
Lead	869.00	847.00
Aluminium	1,708.50	1,841.50
Zinc	1,225.00	1,237.00
Tin	7,300.00	7,250.00

China has grown to become the world's largest base metals consumer now, importing large quantities of refined as well as raw materials. This has led to it to command a discerning position in the base metals market.

China is a net importer of all base metals apart from aluminium and lead, while net importer of raw material for both these metals (alumina and lead-in concentrates).

In comparison, India is a small player in the global market. The futures price movements on the Bombay Metal Exchange are daily set in tandem with those on the London Metal Exchange, the world's largest non-ferrrous metal exchange.

The revaluation has also strengthened other Asian currencies vis-a-vis the greenback. The appreciation of the rupee has made imports of dollar-denominated commodities less expensive. India will benefit as it imports most of its consumption of non-ferrous metals.

However, domestic traders say the rise in domestic prices may be minimal for the cheaper Indian imports this may be just enough to level the firmed up global prices.

Due to early Chinese buying this year, the current market scenario is considered to be a lean season.

The prices are reigning firm due to the global short supply situation, a Delhi-based trader said.

The metals inventories are quite low and unlikely to build up further down the year. For instance, current LME inventories of copper are said to be at their lowest ebb since 1974 and this is likely to keep the prices high.

The market has been talking about a drop in demand vis-a-vis the supply, but the idea does not seem to hold much in it.

The LME three-month copper futures hit a 16-year high of US $3,440 a tonne (from the earlier high $3,435 per tonne in June) while other metals traded firm, when the news on the revaluation came in.

The copper contract ended firm on Friday at $3,436 a tonne and market players foresee it to remain firm.

The Barclays report suggests that the yuan revaluation is likely to keep refined copper imports to China "around high levels, leaving domestic availability good and possibly pressuring domestic prices lower despite robust underlying demand. This would also leave an already tight western world copper market even tighter".

Market players now feel that Chinese buyers may be back in the market earlier than expected, that is end-October.

It was earlier believed that China had bought enough stocks to sustain till October.

The yuan revaluation has led to speculation that China may increase buying in this commodity segment making it one of the top segments to invest in, said a Mumbai-based analyst.

A segment of market players, however, point out the double whammy in the whole scenario "" while China is the net importer of base metals, it is also a large exporter of refined metals, and thus, its exports may also be hit.

They feel the price rise may curtail Chinese buying, despite making the imports less expensive.

This can be following adverse impact on exports of processed industrial products.

Market players feel the Chinese currency, despite this revaluation, still remains undervalued vis-a-vis its Asian counterparts. Thus, the Yuan is likely to be revalued further by another 4-5 per cent.

Any revaluation further is likely to push up prices following a short supply situation.

This may however, curtail buying across the globe with the maximum adverse impact on the Chinese economy.