Base metals to recover in second half of 2008

The current slowdown set to spill over into the new year.

While the first half of 2008 is expected to remain subdued for base metals globally, prices are likely to pick up in the second half. The slowdown, which started in 2007, is set to spill over into the new year as base metals are estimated to slump further by 8 per cent.

But a recovery should follow towards the end of the first half as Chinese traders will jump into the market with fresh bookings.

Although, China's actual consumption may not be as high as it was in 2006 and 2007 as infrastructure development for Olympic Games might be over, the ongoing development plan, bolstered by a robust 11.7 per cent growth in gross domestic product (GDP), will continue. 
 

SLOW AND STEADY Price on LME in $ per tonne
Period	Aluminium	Copper	Tin	Zinc	Lead	Nickel
Jan 3, 2006	2271	4,537	6,595	1,912	1,101	13,505
Dec 29, 2006	2,850	6,290	11,900	4,331	1,775	34,205
Percentage change	25.5	38.64	80	12.65	61.22	153.28
Year high (2006)	2,886  (Dec 14)	8,788  (May 12)	11,900  (Dec 29)	4,619.5  (Nov 24)	1,809  (Dec 11)	35,155  (Dec 5)
Jan 2, 2007	2,830	6,201	11,620	4,259	1,725	33,550
Dec 21, 2007	2,365.50	6,630	16,200	2,356.50	2,655	26,500
Percentage change	16.41	-6.92	39.42	-44.67	53.91	-21
Year high (2007)	2,925 (Oct 25)	8,301 (Oct 3)	17,300 (Nov 16)	4,259 (Jan 2)	3,765 (Nov 2)	54,200 (May 16)
Projection for H1,'08	-	5,700-5,800	-	1,900	1,600	23,000
Projection for H2, '08	-	7,500	-	3,500	2,900-3,000	32,000

Therefore, the demand for base metals would continue, albeit with at slower pace, said Raghavan Sundararajan, an analyst with Kotak Commodities Services.

In India, however, the infrastructure development will continue, especially with the Commonwealth Games to be held in 2010.

The extent of growth, however, could be undermined by rising inflation and slower than expected GDP growth (at 7-8 per cent).

Although the future of base metals would be in part decided by the recovery in the US economy, which witnessed the sub-prime debacle in 2007, the direction will be determined by combined efforts of the developed and developing economies.

Towards the of end of 2007, however, a mixed trend in base metals has emerged. The hot industrial metals - copper, tin and lead - perked up while aluminium, zinc and nickel plunged.

"A slowdown in the US economy has definitely set in," feels an analyst with India's largest research house. But a recovery was also on the cards, he added.

A noticeable improvement in the US housing sector would be evident only in the second quarter of the next year, that is, June-end, which would be a turning point for base metals across the globe, he added.

Ashok Mittal, a base metal analyst with Karvy Comtrade, is more circumspect on the issue of global economic recovery.

He feels that the entire base metals complex will remain bearish in the first quarter and copper may slip as low as $5,250. Lead is holding its ground between $2,000-2,150 with an upside potential in the second half upto $3,200. Zinc has already seen the lows with room for consolidation.

In the first half, therefore, the metal, used mainly for steel galvanising, is expected to head towards $3,000.

In the first quarter of 2008, continued global weakness will reduce consumption of base metals. Moreover, China, which is the world's second largest consumer of base metals, is increasing its interest rates in order to cool down its overheated economy.

Mittal further says that prices may recovery by the second quarter of 2008 once the macroeconomic effect of the cut in rates sinks in.

Moreover, the US Housing sector is expected to recover after the end of the US winter season.

The recovery of the US housing sector is expected to increase the demand of base metals.

Going by the production costs of base metals, even at current prices, secondary producers in India will not suffer much loss. In fact, the price highs in 2007 were much higher than the actual production costs, thus reflecting speculative demand than reduced supply.