Base metals rally around the world

Rising rupee limits the gains domestically but impact of improving demand sentiment expected from next month

With the sentiment turning favourable after the US Federal Reserve's decision to continue easy liquidity, prices jumped on Thursday on the London Metal Exchange (LME), a sign of hope for investment demand and expectation of improvement in offtake, reducing over-supply in the market.

In the Indian market, however, a strengthening rupee has limited the gains in prices on the Multi Commodity Exchange (MCX). This is because the rupee is expected to remain high and overall liquidity is expected to remain easier now. Demand for metals in the domestic market is also likely to improve.

Three-month copper on the LME jumped on Thursday to its highest since August 28, at $7,345 a tonne. Tin prices rose to the highest level in almost six months, to a peak of $23,300 a tonne, supported by a fall in supply from Indonesia. It later pared gains to trade up one per cent, at $23,232. Nickel, lead and aluminium rallied around two per cent. Nickel came off a three-week high of $14,310 a tonne to trade 1.9 per cent stronger at $14,193 and aluminum climbed 2.2 per cent to $1,823 a tonne.

In domestic futures, however, the rupee's rise against the dollar dragged down prices of base metals, before a muted recovery. Aluminium for October delivery was down 75p at Rs 113 rupees a kg on the MCX, while copper's November contract was down around Rs 4, at Rs 464 a kg. The market seems to have begun to believe easier liquidity is likely to continue for some time and, hence, a weaker dollar. Robert V DiClemente, analyst with Citi, said in a note that, "the debate for tapering off may continue for a lengthier time".

As a result, industrial sentiment could also improve here. "The (US Fed) move will help offtake of base metals in the near term, as the interest cost globally will be lower," said G Thiagarajan, director, Comm-trendz Research. However, for Indian companies, demand could improve with a lag and might take a month or two, he said. An improvement after a month is also seen positively, as the September quarter has been bad for corporate sector as a whole.

October on, most analysts felt, an improving demand sentiment for commodities globally is expected to push up metal demand in the domestic market, too. "The second quarter (July-September) of metals companies will not be good but from October onwards, some benefits could be seen," said Thiagarajan. This will be because dollar inflows are likely to remain high, bringing some growth momentum back, he said. Indian non-ferrous metal companies are import-oriented, not much on the export side, said analysts. Due to this, an appreciating rupee is expected to lower companies' input cost for ore and concentrates. "This (rupee appreciation) will benefit metal companies but the impact will come only October onwards in company revenues, since the rupee largely remained weak in July-September," said Harshad Gujrathi, senior research analyst with Khandwala Securities.

Analysts also see a rise in domestic demand for metals, following the global trend.