Metal mart awaits Fed rate decision

ANALYST'S VIEW

The Fed's decision on the US interest rates on September 18 will be crucial for the movement in base metals. An anticipated cut of 25 basis points may end the short-term bearishness, while unchanged rates may push the market into doldrums.

The worldwide market volatility rose to a decade high in August. The soft demand season for base metals coincided with the financial turmoil created by risk averse investors and managed funds.

The losses to managed funds were magnified by the speculative froth. The supply and demand fundamentals have been sidelined as market risk gained prominence.

The interest rate increase and higher cash reserve ratio requirement mandated by the People's Bank of China are aimed at curbing overheating in the economy. The production of base metals has gone up significantly in China.

The demand for copper is likely to remain under pressure in the US as the tight housing market and landing norms may result in lower construction spending in the weeks ahead. The total stocks of copper on all the three major exchanges which monitor the warehouse inventories increased marginally in the month of August.

The sideways to higher trend in stocks is likely to continue as the cancellation activity at key ports remains low. The Chinese demand for all forms of copper would increase the outflow by the end of the month.

The production of zinc in the current year could rise beyond our previously expected growth rate of 6.9 per cent. The revised growth forecast 11.46 million tonnes at the rate of 7.2 per cent. The demand for zinc has been weak.

The fall in prices has seen the emergence of demand side drivers into the market. The long term price outlook for zinc reveals a substantial breakout below important support levels.

POSCO had announced a production cut in September. The announcement by the Chinese government in August to amend rules for investment in nickel pig iron project may reduce the production of nickel from cheap laterite ores.

Nickel seems to be a safer long term investment among metals as it has already corrected. The incentive for producing the metal would diminish with every fall in the dollar prices.

The Chinese market remain the key driver for overall demand in aluminium. Although China has been a key importer of aluminium in the recent past, it can be a net exporter of the metal in the next few years. The LME warehouse stocks remain at high levels and the markets have seen large amount of inflow into warehouses.