 "Base metals likely to see recovery")
Stocks of base metals saw a sharp correction in 2015, with most of these losing a fourth of their values due to slowing demand, led by China, and strengthening of the dollar on expectation of a rate increase by the US Federal Reserve after a decade. Current sentiment is suggesting a further fall in metals prices but experts see the trend reversing, sooner than later. They see recovery in sight but the process could be gradual.
Several factors are emerging, which could support prices from falling and trigger a recovery. The International Copper Study Group has already projected a deficit 2016. And, in the recent past, several producers, including Glencore, Freeport and others, have announced production cuts. GFMS Thomson Reuters Metal Research had projected 2016 as a deficit year for nickel, too.
While the rate rise is most likely to be announced on Wednesday, when the US Fed concludes its meeting, Andrew Cole, principal analyst at Metal Bulletin Research, says: “(Our) Apex poll shows base metal prices rising next year and beyond. That’s the consensus view and (we) would agree. What’s happening now is that analysts are trying to pick the bottom when momentum is still to the downside.”
An industry official here said, “Several mines globally have sold their future production on LME (London metal Exchange) in forward deals. If prices recover, there de-hedging could add to recovery.” Many analysts had earlier thought metals would not fall much below their cost but the fall continued. Now, says Andrew Cole, the costs of production are falling, “which could be opening up more downside potential but there are a number of other factors in play that favour the close-to-the-bottom theory”.
Kunal Shah, head of research at Nirmal Bang Commodities, said: “Several stimulus measures announced by China, including a series of rate cuts and relaxation in reserve requirements, would come in play and metals demand would improve and prices recover.” For Indian customers, he says, if depreciation of rupee against dollar (in last six years) are not taken into account, most metals (including copper) are available at 2008-09 prices. Shah believes even after the Fed announces a rate rise, the dollar might not appreciate by much. Rather, profit booking by dollar bulls would provide support to metals.
Chinese slowdown worries might have been overdone, say some. On this, Andrew Cole of Metals Bulletin said, “For some metals, the negativity is overdone. For copper, for example, we don't agree that apparent demand is as awful as all the bearish sentiment suggests.”
He explains demand from China comes from several sources — physical demand (manufacturing, etc), strategic demand (State Reserve Bureau), financial demand (due to tight credit, the arbitrage, etc), scrap replacement demand and the restocking/destocking cycle. Many elements are in the play.
The November import numbers were good, about 10 per cent up. Next year, “We should also see more of China’s stimulus working to support industrial demand. We’ve already seen automobile sales pick up, a bit of a rebound in housing and a pick-up in grid spending. Next year, for copper, we are forecasting three per cent growth in demand in China,” said Cole.
His explanations on why the market got over-bearish about demand and overshot on the downside, is, “partly due to the weight of money coming from the now very powerful Chinese hedge funds (which are mostly bearish)” and there’s good scope for a modest recovery next year. “Price cycles always overshoot at the top and bottom.”
However don’t jump to conclude there would be a fast recovery in the prices of metals. Andrew Leyland, director, metals & mining consulting, Wood Mackenzie, London, said: “There is pessimism on Chinese commodities demand and this is impacting both prices and investment in the sector, and will lead to supply shortages and price spikes. But, this will happen one market at a time. It’s unlikely we'll see the type of boom in demand that will lead to a wholesale recovery of prices across the sector.”
China’s 13th five-year plan runs from 2016-2020 and this is likely to moderate the earlier infrastructure and manufacturing boom, as China’s concerns for a clean environment are increasing. Leyland says, “For metals, this means we're likely to see a continued decoupling between GDP growth and industrial metals demand.”
However, things could be difficult for steel, which continues to be plagued by over-capacity. According to Leyland, “It’s going to be a painful process to shake this out. While average steel production costs have fallen 18 per cent this year, sales prices are down 27 per cent and margins are being squeezed.”
