The recent rally in base metal prices found no follow-through and sustaining the momentum was looking more difficult, due to no improvement in the fundamentals. The macroeconomic sentiment, however, has improved lately with the US government successfully avoiding the fiscal cliff effect. Since metals are the barometer for economic sentiment and weakness, they are bound to be benefited. Upbeat Chinese economic data will also be supporting sentiment and prices. Earlier this week, China’s HSBC manufacturing purchasing manager’s index for December rose to 51.5, a 19-month high. Portfolio rebalancing could also help support prices, as some markets expect the red metal’s price to rise higher due to economic optimism. These could be swept higher but are likely to ease as we approach the Chinese lunar new year.
The builds in LME, SHFE and Chinese-bonded copper stocks so far suggest that price could get capped on the upside, despite a resolution to the US fiscal cliff.
LME inventories have risen almost every day since the beginning of December and are up 54,000 tonnes so far. SHFE inventories were up 8,300 tonnes in December and Chinese bonded stocks have also continued to rise. Aluminium, nickel, zinc and tin stocks are also rising, reflecting markets in surplus in the fourth quarter of 2012. In the year so far, LME zinc stocks have risen a whopping 407,000 tonnes, much higher than this year’s surplus of 195,000 tonnes. We believe this reflects off-warrant metal being warranted and put into financing deals. There was certainly enough of a surplus in 2011 to generate this volume of metal, with the 2011 surplus of 409,000 tonnes. LME nickel stocks, meanwhile, have risen 47,000 tonnes in 2012 so far, which fits with our estimate of this year’s surplus of 79,000 tonnes, with the remaining metal believed to have been stocked in China. Lead has outperformed the rest of the complex and is the only metal to still be holding on to recent highs. While the lead fundamental outlook for 2013 is constructive, the recent economic optimism should only add to the positive outlook.
We expect the base metals complex to outperform the non-agri commodity complex this year, on the back of positive macroeconomic sentiment, revival of growth in the two of the world’s largest economies, China and the US, and receding worries over the Euro zone. As we grow optimistic about the prospects of base metals, it is prudent to consider the risk factors to our view. One, we consider the Euro zone to be a matter of worry even in 2013. Two, the quantitative easing programme by the US Federal Reserve could be withdrawn, the main catalyst for the revival in growth. Three, high stocks might cap the upside for prices. Therefore, though we maintain our bullish outlook on the back of the positive macroeconomic sentiment, we remain cautious on the risk factors and recommend booking profits at all levels during this rally, as prices could get volatile due to news flows.
Resistances will be seen at $8,250/tonne for LME and close to $455 in MCX. For the year, we expect copper to average $8,700/tonne and $475 in MCX. Aluminium could also rise on the back of optimism in the base metal complex. We expect prices to average $2,000/tonne in LME and $135 in MCX for the year. Nickel could average $18,000/tonne and in MCX, we expect prices to average $1,025 in 2013.
The writer is director, Commtrendz Research
Disclaimer: The content here, compiled from various sources, is not a recommendation to buy/sell commodities and currencies. The author is not liable for any loss or damage, including without limitations, any profit or loss which may arise directly or indirectly from the use of above information
