Base metals to stay erratic on supply gaps

MARKET OUTLOOK

Base metal prices are likely to remain volatile this week over supply disruptions from major mining countries.

Mining rich countries, such as Zambia, South Africa and China, are facing acute shortage of electricity and the respective governments have instructed mining companies to cut output.

However, uncertainties over supplies from these countries are likely to be offset by poor demand from the Chinese players, who would be on a week-long Lunar Year leave starting February 12.

Experts believe that China, the world's largest buyer of base metals, has already completed the bulk of its purchases. Upon good opportunities, Chinese traders may book afresh but not in major quantities.

"However, the long-term outlook is bearish with copper, the trend-setter, may find its support level between $6,700-6,800 a tonne by the early second half of 2008," said Jayant Manglik, head (commodities), Religare Enterprises.

"Amid demand likely to remain flat, the planned commencement of mines in Peru and Chile is expected to compensate the production loss in South Africa, Zambia and China. Therefore, metal consumers need not have supply worries," Manglik added.

A copper mining unit in Zambia belonging to Vedanta Resources has also been asked to curtail production to save energy for other purposes. Importantly, China's top integrated copper producer, Jiangxi Copper, is planning to shut down 300,000 tonnes of its total 700,000 tonnes smelting capacity due to electricity disruptions and a harsh winter.

Meanwhile, base metals perked up between 4-14 per cent across all sectors last week on dramatic shift in fundamentals. On the London Metal Exchange (LME), copper surged 6.56 per cent while aluminium rose 9.36 per cent.

Zinc remained the best performer witnessing a gain of 13.39 per cent, while tin recorded a 4.06 per cent rise in prices.

The Mumbai non-ferrous metals market could not react to the price appreciation in the international markets but an upsurge in prices was recorded across all metals to the tune of Rs 5 a kg. A majority of scrap varieties, however, including copper utensil scrap (Rs 315 a kg), ended the week unchanged.

Experts say the worsening economic condition in the US, the world's largest economy, may bring down demand for base metals. This could lead to decline in prices in the future. The Federal Reserve's second major interest rate cut within a fortnight (50 basis points) strongly indicates the country may well already be in recession.

Gain in prices of aluminium, another beneficiary of the outages in China and South Africa, may be capped by high inventories. Stockpiles of aluminium monitored by LME stood at 956,625 tonnes on Friday, the highest since June 2004.