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The rally in base metals is driven by hopes of increased infrastructure spending in the US when Donald Trump takes the helm of the world’s top economy. The main reason for the base metals surge in recent times is coal, iron ore and steel all posting surprisingly strong gains. So, let us look at these three items for direction ahead.
Iron ore has enjoyed a stellar year, with a 161% increase in spot price so far in 2016, driven by modest rise in Chinese steel output contrary to a sharp fall expected by most market participants. The problem is that hardly anybody, including major miners, believes these sort of prices are sustainable over the medium to long term. Will this uptrend sustain?
The Dalian Commodity Exchange’s forward curve points to lower prices next year. If Chinese steel output remains steady in 2017, there is a reasonable expectation that Chinese iron ore imports will also be steady to potentially higher. However, it’s still likely that iron ore market will be in a state of oversupply next year, just perhaps not by as much as many in the industry fear.
This week, zinc has felt the speculative heat emanating from China. On the day after the election of Donald Trump as US president, zinc barely moved even as copper was going into bullish hyper drive. The zinc market volatility has reflected the same hidden speculative and mechanical drivers that were in play in copper.
Copper is on course to its biggest weekly rally in 35 years. It’s a standout even amid the turbulence that has rocked the broader financial universe. The rally has been with high volumes leaving no room for suspicion. The entire global copper market, it seems, has been repositioned from bear to bull territory in a few days. Chinese demand has been running at a much faster pace than originally expected, thanks to the government’s stimulus package early this year, and with LME inventory falling fast and Shanghai Futures Exchange (ShFE) stocks low as well, there was little tangible sign of oversupply in copper.
Fund money started flowing into copper in ever increasing quantities. Goldman Sachs said on Thursday, it was closing out its short March 2017 copper vs March 2017 half unit zinc long position after reaching a stop-loss of minus eight per cent. Momentum trading funds then join the feeding frenzy and high-frequency funds amplify the effect. That $5,000 level had added significance for option traders.
Options open interest is also often clustered around such big-number levels. Options sellers covering their exposure to buy futures would have added fuel to an already red-hot market. The last part of copper’s price rally has been driven by Chinese players waking up to what has been happening in the rest of the world.
The robots have taken over. Other markets have learned the power of the robots. This is probably the first time the base metal markets have experienced it. However, it won’t be the last time.
We don't see the metals rally as a one-off and one that could potentially fizzle out. Headwind in the form of dollar strength is a potential worry, as most metals are priced in dollars and they become expensive when it strengthens. But, the fundamental rooting has been strong with supply outages and robust demand that could provide support. Also, post the interest rate hike, there is a scope for the dollar to start declining, which happened earlier also. Technically, we expect any dips to find support around $5,000 and test $6,500 or even higher towards $7,200 in 2017.
(The author is director, Commtrendz Research and a consultant to commodity bourses and firms in India and abroad)
(The author is director, Commtrendz Research and a consultant to commodity bourses and firms in India and abroad)
