Industrial metals have been on a roller coaster kind of ride in the past couple of years, falling and rising. But for nickel and aluminium multiple pressure points suggest the recent pullback in prices may not sustain.
Nickel had a rough 2012, and so far it looks like 2013 will not be much better. Prices have fallen 14 per cent from the start of the year and are down 33 per cent from the peak of $22,150 last year, hit hard by China's slowing growth. Aluminium is pretty much in the same boat. Prices have fallen 13 per cent from the start of the year, and are down 20 per cent from the peak of $2,362 last year. For both metals, the downtrend story is strikingly similar. The gradual slide in prices is being caused by a number of factors; lower buying by the Chinese, slowdown in growth, an oversupply of the metal due to vast production and opening of new mines and alternative cheaper and convenient substitutes for usage.
While there is little to be done about low demand, some reduction in production is crucial. A string of companies that produce nickel like Glencore Xstrata and Norilsk Nickel have closed mines or suspended production. If such reductions take place and the excess supply in the market is cornered, these metals could stand a chance of avoiding a performance as disappointing as last year.
However, with large, integrated operations, it's difficult for bigger companies to close mines, as the smelter depends on the ore coming from these. But exploration companies which find and develop mineral deposits in hopes of selling to large mining companies are hurting. The viability of operations is being questioned and companies are now not striving to be the biggest producer in the world but the best, with an eye on long-term success.
Overall, both metals are in a pullback mode but for the medium-term perspective, it looks difficult to sustain on the upside. We expect the upside in nickel to be capped on the London Metal Exchange (LME) around $15,200-15,700 and on the Merchant Customer Exchange (MCX) towards Rs 950-980. While for aluminium, an upside towards $1,950-2,000 on the LME and Rs 118-120 on the MCX would again attract the bears.
The author is head, commodity & currency, Motilal Oswal Securities
