Base metals bottom out, may rebound

Many metals are trading near their cost of production

Base metals are likely to remain firm in the coming weeks, on positive fundamentals emerging after dollar’s continuing strength and China’s intention to boost investment in the power grid, easing thereby fears of future demand.

Analysts hope that the European Central Bank’s scheduled meeting next week over bond buying programme, or quantitative easing, and the US Fed’s upcoming assembly later this month will support the undertone of base metals for the rest of the year.

After falling 14 per cent in 2014, copper had plunged 11 per cent in just two weeks this year. On Thursday, the Swiss government unexpectedly scrapped its minimum exchange rate. Copper fell five-and-a-half year low to $5,325, but recovered a marginal later on bargain hunting and short covering by bulk consumers and traders. Other metals like aluminium, lead, nickel and zinc also followed suit and closed with a decline albeit low.

“Base metals have bottomed out as the dollar has peaked against global major currencies. Strengthening dollar coupled with the current price level which stands around the cost of production will drive metals prices led by copper up,” said Jayant Manglik, president, Religare Securities Limited.

  Interestingly, global major producers have started curtailment in production capacities due to steep fall in metals prices. In 2014 alone, aluminium producers have cut production capacity by around 1 million tonne, as they feel the prevailing price of $1,798.5 is uneconomical. The case is similar with copper and other metals. Copper producers have also cut production capacity by over 1 million tonnes last year.

Barclays Matthew Korn said, in a report: “Lower-than-expected metal supply will outweigh a slowdown in Chinese consumption growth and push copper prices higher.”

Meanwhile, the copper monitoring body, International Copper Study Group (ICSG), has forecast global copper surplus to narrow in 2015 with its usage at 22.80 million tonnes as against production at 23.1 million tonnes. Similarly, the International Lead and Zinc Study Group (ILZSG) estimates global zinc demand to rise by 2.9 per cent in 2015 to 14.05 million tonnes as against its production growth at 3.3 per cent to 13.68 million tonnes. Nickel production is forecast at 1.95 million tonnes against the metal’s usage of 1.97 million tonnes.

Societe Generale analyst Robin Bhar said, “The Chinese government has kept infrastructure projects on fast track. The steep fall in copper prices indicate the decline is overdone not related to fundamentals.”

Analysts estimate cost of production of copper is between $5,200 and 5500 a tonne and aluminium is between $1650 and 800 a tonne depending upon size of mines and smelters.