Industrial commodities dip on broad-based sell-off in stocks, trade tension

Base metals and energy shed up to 3% on Thursday, declining for the second day in a row at the LME, Nymex and Shanghai Futures Exchange

Industrial commodities tumbled on Thursday in the global markets due to a broad-based sell off in equities and the widespread negative sentiment about the growth of global economy caused by the intensifying trade war between the United States and China.

Base metals and energy shed up to three per cent on Thursday, declining for the second day in a row on global exchanges such as the London Metal Exchange (LME), Comex division of the New York Mercantile Exchange (Nymex) and Shanghai Futures Exchange (SHFE).

In early trade, copper on the LME lost 1.6 per cent to $6,142 a tonne, followed by other metals such as aluminium, lead, nickel and zinc. A report from Kedia Advisory said nickel price were down 1.18 per cent to $12,550 a tonne on the LME. Apart from base metals, crude oil was also down by over two per cent in Thursday afternoon trade.

“Base metal prices declined primarily because of the overall weak macro-economic situation. The stock market sell-off in the United States led to the fall in global equity markets and the US dollar against major global currencies,” said Gnanasekar Thiagarajan, Director, Commtrendz.

Oil fell to the lowest in almost two weeks, as Hurricane Michael threatened to slash fuel demand across the US Southeast. In New York, oil futures shed 2.4 per cent. West Texas Intermediate for November delivery traded at $72.63 a barrel after settling at $73.17 a barrel on the New York Mercantile Exchange, the lowest closing price since September 27. December Brent lost $1.91 to close at $83.09 on the London-based ICE Futures Europe exchange.

The broad-based sell off intensified after the International Monetary Fund (IMF) issued a warning about financial stability risks following the ongoing trade tenstions.

Reports said that China had sold US treasury bonds worth $1.3 trillion the past three days, escalating its trade war with the United States. Earlier, both countries levied multiple duties to restrict the import of goods and services from each other.

Industrial commodities are a barometer for global economic growth. Hence, the current decline in base metal prices indicates global economic uncertainty resulting in lower demand for key metals such as copper, aluminium, nickel and zinc in the coming quarters. The US dollar also fell sharply against major global currencies.

“A pullback in the dollar index, coupled with reports of China having sold US treasury bonds worth $1.3 trillion, has lowered (the sentiment in) industrial commodities. Also, a correction was due in industrial commodities for quite some time. Hence, the current decline may be attributed to all three aforementioned factors combined,” said Navneet Damani, an analyst with Motilal Oswal Financial Services.

According to Amit Dixit, an analyst with Edelweiss Securities, zinc has outperformed all other metals on the LME. While its price jumped by 12.2 per cent over the past one month before Thursday’s fall, prices of copper and aluminium moved up by 6.5 per cent and 0.9 per cent during the same period. In contrast, lead declined by 7.2 per cent.

“The gain in zinc prices will be short-lived. Strong global zinc prices over the past 18 months have prompted miners to utilise idle capacity. While some capacity in calendar year 2015 was closed permanently due to exhaustion of resources, the return of some stalled capacity (taken offline) and new projects is on the cards. We see the ongoing zinc mining capex of $11.9 billion to alleviate any medium-term supply concerns. While some of the projects have started, we see meaningful additional capacity coming by calendar 2020, primarily from Australia, US, Canada and Greenland,’ said Dixit.

This means supply side issues will remain a matter of concern, said Thiagarajan. “With prices of base metals, barring zinc, broadly moving around the cost of production, global miners and smelters would be prompted to cut their production, whuch would add to supply side worries. Later, however, we can see some bargain hunting from investors,” Thiagarajan added.

However, before any take off, industrial commodities are set to decline marginally from the current level to offer investors the opportunity to enter into this segment.