Base metals usage reflects the sustenance and strength of a country’s economy because it is used in infrastructure building. This underlying fact has continued to be the dominant factor driving base metals prices over the last decade. This concept is equally applicable over the immediate term.
The recent past has seen a semblance of recovery and definite attempts by governments worldwide to increase infrastructure spend to boost their economies. Therefore, the next quarter should see relatively firm prices though it is also true that there can be no significant upside so long as the economic growth in major economies continues to be suspect. Briefly, investments in nickel may show better returns than copper, lead, zinc and aluminium due to weak supply and increasing demand.
Other major factors driving base metals prices will be opinions on the strength of European banks as doubts about their financial resilience refuse to go away. Some signs can also be taken from the way global stock markets behave and improving indices will indicate better commodities’ offtake and demand optimism. Typically commodities stocks on the bourses are the first to track changes in base metals prices.
The picture is not all gloom — LME warehouse stocks have been declining and there are several orders in the pipeline to take delivery of copper. Also, Chinese demand, though erratic, is still visible and is expected to be a pillar of strength for the base metals complex. Imports to China are already up 8 per cent compared to last year and sales of cars, too, are up this year, and all this is inspite of Chinese attempts to slow their economy. Finally, growth in the US —world’s second largest consumer of copper after China — continues to be inconsistent.
Currencies, too, will play a major role in pricing base metals. A stronger dollar makes it more expensive for other currencies to buy metals as they are priced in dollars. In fact, LME copper prices have fallen 11 per cent since January in response to the strengthening of the dollar by 8 per cent. However, as the dollar weakens now, prices will rise but the eventual arbiter of prices will continue to be the demand-supply equation which is a bit iffy right now but still positive.
While all major factors have to be tracked daily in response to the dynamic global economic situation, the changing demand, inventory and currencies valuations have ensured that most of them are factored in and the base metals market will move in a band with an upward bias. The only hiccup is the possible news of another failed country in Europe!
The author is President, Religare Commodities