Base metals tumbled today amid fears that Spain will become the fourth Euro zone economy to seek a bailout, thereby denting, the global economy and metals consumption.
While copper plunged to $7,388 a tonne, a decline of 3.1 per cent from the previous day, nickel followed suit and hit $15,450 a tonne, its lowest since July 2009. Nickel dragged down amid concerns that a weak Euro zone economy would attract fewer investments in the infrastructure sector, resulting in lower consumption from its downstream user segment, stainless steel. Other base metals fell in line with demand sentiment in consumer industries.
In a worsening indication towards the need for a bailout, Spain’s bond yield reached 7.5 per cent this week against seven per cent previously. Anything beyond seven per cent is dangerous for the economy, as seen in the case of Greece, Ireland and Portugal.
The three Euro zone economies sought a bailout after their bond yields shot past the seven per cent mark. Meanwhile, the Spanish government has cut its economic forecast for 2013, indicating the country would stay mired in recession well into next year, after an expected contraction of 1.5 per cent in 2012.
| ALL FALL DOWN Base metals to remain under stress ($/tonne) | |||
| Metal | 23-Jul | 20-Jul | Change (%) |
| Copper | 7,388.0 | 7,625.0 | -3.11 |
| Aluminium | 1,835.5 | 1,894.5 | -3.11 |
| Nickel | 15,650.0 | 15,830.0 | -1.14 |
| Zinc | 1,799.0 | 1,851.0 | -2.81 |
| Lead | 1,850.5 | 1,899.0 | -2.55 |
| Tin | 18,455.0 | 18,990.0 | -2.82 |
| Source: LME | |||
“Since the bond yield of Spain has surpassed the alarming level of seven per cent, seeking bailout becomes obvious, which is set to have a cascading affect on the rest of the world,” said Priyanka Jhaveri, an analyst with Kotak Commodity Services Ltd.
Weakening sentiment from consumer industries raised apprehensions that consumption of base metals would remain under severe stress. Slowing economic growth in China, faltering pace of recovery in the US and recessionary worries in the Euro zone also supported base metals’ moves today.
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In a move, which could deepen the crisis-like situation, the International Monetary Fund (IMF) recently cut its forecast for global economic growth and warned the outlook could dim further if policymakers in the Euro zone do not act with enough force and speed to stem the debt crisis in their region. IMF cut its 2013 forecast for global growth to 3.9 per cent from the 4.1 per cent it had projected in April, but kept the 2012 forecast unchanged at 3.5 per cent.
Naveen Mathur, associate director of commodities at brokerage firm Angel Broking, said, “Base metals prices fell in today's session, tracking bearish global market sentiments, coupled with strength in the US Dollar Index (DX). Expectation of a slowdown in the Chinese economy and the US, and lingering concerns of the Euro zone debt crisis, which is hurting the growth of the global economy, also added to the losses of the base metal prices.”
The Chinese economy is expected to decline in the third quarter of 2012 to 7.4 per cent against 7.6 per cent in the last quarter, according to the Chinese central bank advisor. This is likely to reduce the demand for base metals, as China is the major consumer of the commodity.
Further, rising debt of the Euro zone and the European leaders unable to tackle the crisis is causing the global economy to become slower, which might hurt the consumption of copper, adding downside pressure to prices.
According to the International Copper Study Group, the global refined copper market reported a deficit of 384,000 tonnes in the first four months of 2012, against a deficit of 26,000 tonnes during the same period in 2011. Also, support indication on the London Metal Exchange (LME), fuelled fears of a supply squeeze similar to the one in April.
A report by Kotak Commodity said, “Mixed macro economic data from the US and the Euro zone dented market sentiments, too, putting pressure on prices. In the US, macro economic data continued to remain mixed, signaling faltering pace of recovery in the region.”
Further, nickel prices came under pressure amid a weak demand outlook coupled with rising stocks on LME warehouses. The global nickel market was in supply surplus by 27,000 tonnes in the first five months of 2012, the latest monthly bulletin from Lisbon-based International Nickel Study Group showed.