Holiday mood dampens base metals market

The prevailing illiquid conditions, coupled with some selling pressure from the hedge fund community, pushed base metals prices down on the London Metal Exchange (LME) and in the domestic market last week.

Weakening demand from consumers amid higher prices throughout the year led to traders abstaining from fresh bookings. Instead, they sold heavily to book profits for healthy year-end balance sheets. Large traders remained absent from the markets, owing to extended holidays for Christmas and New Year.

The direction of the base metals will be determined next week only when international traders resume trading in full swing with fresh enthusiasm in the new year, a trader said.

Amid low trade intensity, copper prices slipped below the benchmark of $6,300, recording an 8-month low in the late kerb, but recovered to settle at $6,330 after Asian traders took some positions on the LME on Friday. The prices were lower than the Wednesday's level of $6,405, yet 46 per cent up since January 1 "" although a long way off the $8,825 level May, a 103 per cent increase on the year then. About 4,025 tonne of inventory way-in in the LME warehouses is also partly responsible for the price decline, a domestic trader said.

Traditionally, the domestic metals market follows the LME. Hence, a price decline on the LME percolated down to the Mumbai non-ferrous metals market,; taking the base metals prices southward.

Following copper, aluminium slipped to $2,800 in the Friday's late kerb, but shot up marginally higher on a fresh bout of buying before the market closed at $2,830, setting off a weekly loss.

Although the current lack of buying interest is a temporary phenomenon and will recover very soon, the market is looking technically weak and will remain under pressure in the beginning of 2007, as hidden stocks, coupled with fresh production expansion, have started showing good result.

In the case of aluminium, the agreement signed between Alcan management for Alma smelter and the labour union would initially run through December 31, 2011, but can be extended to 2015, if Alcan begins work on expanding the smelter by the end of 2010. The Alma smelter has a capacity of 408,000 tonne and employs about 1,000 people. Alcan has a global smelting capacity of 3.5 million tonne per year, represented by the company's network of 21 smelters in 10 countries.

Any kickstart in price needs a fresh supply disruption issue, which is totally absent from the market. Holiday sentiment in various parts of the world affected aluminium stocks arrival, thereby resulting in an inventory decline of 2,150 tonne to settle the week at 699,325 tonne. A mixed trend prevailed in the Mumbai non-ferrous metals market with copper wire bar and copper heavy scrap losing Rs 2 to settle the week at Rs 338 a kg and Rs 333 a kg respectively. But, the unavailability of other scrap metals pushed the prices up, resulting in heavy scrap and sheet cutting gaining Re 1 and Rs 2 to close the week at Rs 306 a kg and Rs 322 a kg respectively.

Copper wire bar and tin slab also moved up by Rs 5 and Rs 7 to settle at Rs 365 a kg and Rs 602 a kg respectively.

Generally, any move on the LME takes at least 4 to 5 days to percolate onto the domestic markets.

Hence, the current decline on the LME would make an impact next week, if the downward movement in London continues, a local trader said.

The decline in base metals prices is mainly attributed to the lower demand in the US. Demand for primary metals used by US companies fell by 1.9 per cent last month, after a 0.1 per cent rise in October, according to the US commerce department. Orders for US machinery declined 8.9 per cent in November and makers of electrical equipment and appliances saw a 1.5 per cent decrease.

Experts remain optimistic on the outlook of base metals, as investors have gradually started considering base metals as an investment option, a trader said. In the case of red metal (copper), the price is expected to spurt in the wake of supply disruptions from Zambia's second largest miner, Mopani Copper Mines (MCM), which halted operation owing to deadly floods.

Zambia's biggest miner, Konkola Copper Mines (KCM), was forced to suspend operations owing to environmental damage two months ago. For the first six months of 2006, MCM produced about 78,746 tonne of finished copper and 769 tonne of cobalt.