Copper may lead metals fall due to weak demand

Market Outlook

The base metal prices, led by copper, are likely to decline this week due to weak demand from the construction and electronics sectors in the US and China, the first and the second largest metals consumers respectively in the world.

The demand of copper, largely used in the electrical, electronics and construction sectors, is set to recede in the US on economic recession. China is also likely to cut down import of metals this year as infrastructure development in the country is expected to slowdown after the Olympic Games scheduled later this year. China has been developing world class infrastructure to host Olympic Games for the last three-four years, driving the demand of base metals substantially.

With approximately 20 per cent of copper used in infrastructure, the slowdown in Chinese consumption is set to have a negative impact on the prices. Besides, the decline in consumption in two major economies of the world is unlikely to be compensated by the marginal rise in the developing countries. "Although the rate of the decline may not be as much as the rise in the prices last week, the fall is imminent," said Jayant Manglik, head-commodities, Religare Enterprises.

Copper prices are expected to trade in the range of $4,500-$6,500 a tonne between 2008 and 2012, analysts said. Last week, copper perked up by 6.5 per cent to $7,740 a tonne from $7,345 mainly on inventory decline because of lower production by Codelco of Chile and Jiangxi of China and speculative buying ahead of Chinese Lunar Year holiday.

According to an estimate, hedge funds also took healthy position in the red metal. Copper inventory dropped by over 6 per cent to 166,750 tonnes, the lowest since October 30, while zinc stockpile jumped 3.18 per cent to 115,600 tonnes, the highest since October 25.

The largest copper mine in the world, Codelco of Chile, reported a 5.3 per cent decline in its output in 2007, its largest drop since 1991. Jiangxi Copper, China's second-largest producer, also recorded a slide in its smelting output after snowstorms hampered power supplies.

Experts believe that copper supplies will exceed demand by 360,000 tonnes.

Aluminium moved in closed range last week to settle at $2,676 a tonne from $2,680. Selling pressure was seen in nickel, which slipped to close the week at $27,705 a tonne from $27,355 a tonne on Monday. Zinc slipped 6.42 per cent last week on huge inventory built up to close at $2,506 a tonne.

However, in the domestic market, traders preferred to wait and watch because of huge volatility in LME prices.

A local trader said that copper prices were ruling at unrealistic levels purely on speculative basis. "The correction is imminent as the cost of production at $3,000 a tonne is much lower than the current prevailing prices," he said.

In the Mumbai spot market, copper wire bar gained Rs 6 last week to close at Rs 378 a kg while copper utensil scrap gained Re 1 to settle at Rs 316. Aluminium ingot closed unchanged at Rs 125 a kg while nickel slab ended the week at Rs 1400, a gain of Rs 5.

On the Multi Commodity Exchange, Copper February contract rose 0.13 per cent to Rs 306.85 a kg, Zinc contract gained 0.36 per cent at Rs 97.05, Nickel moved up by 0.23 per cent to Rs 1,103, lead by 0.69 per cent to Rs 117.45 and Aluminium by 0.05 per cent to Rs 105.05.