Base metals, Crude oil: Plunge on oversupply

Base metals posted a sharp decline as demand from China contracted. The world's largest consumer is witnessing an economic slowdown, despite measures by its government like interest rate cuts and currency depreciation, to boost demand.

Nickel, used primarily in stainless steel-making, led the decline and fell 44 per cent to $8,590 a tonne, followed by zinc and copper. Most metals hit multi-year lows, prompting primary producers to cut output.

"Almost all these metals reported surplus in 2015 due to weak Chinese offtake. But, production cuts announced by major producers would have a positive impact in 2016," said Ajay Kumar Kedia, managing director of Kedia Commodity.

On aluminium, CRU's managing consultant Marco Georgiou says, "China will remain in surplus and exports will rise. This will cap prices over the next 10 years." The downward move of metals was driven largely by the decline in crude oil prices following the refusal of the Organisation of the Petroleum Exporting Countries (OPEC) to cut output. The scenario worsened with oil prices falling to an 11-year low in December after Goldman Sachs forecast it to hit $20 in 2016.

Despite geographical tensions, robust crude supplies continue from all key producers including Arab countries, Russia and the US.

  Base metals prices, however, can see a rebound in the second half of 2016 as output cuts start reflecting. "The Fed has indicated that it is anticipating four rate hikes next year. The markets are, however, expecting something different and the Fed funds futures suggests there will be just two hikes, in June and December. The first quarter of 2016 may be slightly beneficial for commodities, as the Fed observes the effects of the rate hike on the US economy," said Gnanasekar Thiagarajan, director, Commtrendz Research. Key things to watch out for in 2016 will be the pace of rate hikes by the US, China's growth and supplies from metal and oil producers.