Base metals, led by copper and lead, rebounded after the decision by European leaders to protect the region’s economy from a worsening debt crisis by pumping in a $1-trillion supportive package.
However, sustainability of the rally would depend on how the details play out. As of now, there are hopes anew on new demand from, among others, restructuring in Japan after last year’s tsunami devastation and fresh investment in US infrastructure.
Copper rallied to $8,260 yesterday before profit booking pulled the red metal down marginally amid fear of uncertainty. It recorded a gain of 15.4 per cent in the six working days since when hopes for a euro zone solution emerged), to settle on Friday at $7,981.5 a tonne. The prices of lead, zinc and nickel shot up by 10.9 per cent, 9.03 per cent and 8.5 per cent, respectively. Aluminium and tin, however, could not support the rally actively due to surplus availability in warehouses registered with the London Metal Exchange (LME). (Click here for graphs)
Among precious metals, silver rallied amid hopes of a recovery in manufacturing sector demand, which makes for nearly 65 per cent of the total. In the past six trading sessions, silver went up a little over 15 per cent, as did the LME metal index. Although gold also rallied, Ajay Kedia, a base metal analyst with a city-based broking firm, Kedia Commodity, sees little potential for its further growth.
Following a rebound in stock prices and metals, the BSE metal share index on Friday went up six per cent, reflecting global sentiment. Kedia, a base metal analyst with a city-based broking firm, attributes the current rally in the red metal to supply-side disturbances. With some of the world’s major copper mines — Grasberg, Freeport’s Grasberg and Cerro Verde — facing a labour strike, the supply of copper concentrates to refineries is likely to remain subdued until the year-end, said Kedia.
In a recent meeting, D Bhattacharya, managing director of Hindalco Industries, one of India’s largest primary copper producers, had warned of supply-side concerns through the falling grade of copper in major mines, including Escondida, Collahuasi and Kennecott. Consequently, Goldman Sachs Group Inc forecast a 300,000-tonne copper supply deficit in 2011. Goldman analyst Fawzi Hanano had said, “On aggregate, third-quarter copper production missed our estimates by three per cent and was down 15 per cent year-on-year and eight per cent quarter-on-quarter.”
Overall, this was a relief rally offered on the two-year euro zone sovereign debt crisis, said Naveen Mathur, associate director, Angel Broking. “We believe the bleak outlook which was shadowing the European economy and affecting the entire base metal complex is muted,” he said.
The European region has been struggling to cope with the ongoing economic slowdown. It is the distribution of the financial package which would be interesting to see. For now, half is proposed to be used for debt loss and restructuring and the rest for writing off banks’ losses. Leaders are expected to come out with the details next month.
The government of Japan is actively working on rebuilding its infrastructure, damaged by the tsunami. Apart from that, the positive US data may be temporary. Hence, developments in the next two months are set to decide the movement in base metals. The economic revival in the euro zone are likely to weaken the dollar against major global currencies, including the euro. This may help raise confidence in other asset classes, including base and precious metals.
According to Gnanasekar Thiagarajan, director, Commtrendz Research, the current economic support will translate into higher demand of base metals and, hence, prices.
