Base metals to trade lower on weak demand, supply surplus

London (Oct 11)  Base metal prices are likely to trade lower on concerns of weak Chinese demand along with trimming of global economic growth forecast by the International Monetary Fund (IMF).

While oversupply in the global market amid expectations of continued poor demand is expected to support base metals' September fall, the Federal Open Markets Committee's (FOMC) accommodative monetary policy for a longer period of time will provide a cushion and therefore, restrict them from a massive decline. Overall, industrial metals are on a downward march.

"Copper prices are likely to trade lower owing to escalating supply glut concerns as Newmont Mining Corp sent out its first copper concentrate shipment from Indonesia in September. In addition, copper output in Japan is also expected to rise to worsen the red metal's supply. Apart from that, aluminium prices will trade lower as concerns regarding demand outlook in China, the top consumer of the metal will push prices in the negative territory. Besides, Norsk Hydro (one of the largest aluminium supplier companies) is expected to increase its aluminium output at its Sunndal plant in Norway by 30 per cent by the end of the year and wants to further increase its output by an additional 35,000 tonnes by mid-2015," said Naveen Mathur, Associate Director, Angel Broking.

Led by nickel, base metals' price declined in September. On the benchmark London Metal Exchange (LME), nickel price fell by a steep 13.5 per cent followed by 7.1 per cent lead, 6.8 per cent aluminium, 4.4 per cent copper and 3.6 per cent in zinc.

Base metals on the LME traded on a negative note in September as China's factory output grew at the weakest pace in nearly six years in August while growth in other key sectors also cooled, raising fears of slowdown in the world's second-largest economy and demand concerns in the biggest consumer.

Also, weak housing, construction and manufacturing data from the US indicated declining activity in the sector which significantly accounts for base metal consumption dragged prices lower. Further, LME stocks of all base metals rose except aluminium.

In addition, dollar strength which jumped to 4-year high after the Federal Reserve raised interest-rate estimates to 1.375 per cent, compared with 1.125 per cent in June for end 2015 in its September meeting added to downside.

Meanwhile, IMF in October revised global economic growth forecast downwards to 3.4 per cent for 2014 from its earlier assumption at 3.7 per cent. Weak global economy will lower expenditure on infrastructure resulting into lower demand and thereby, prices for base metals.

Vikas Khemani of Edelweiss Securities believes global aluminium demand to growt at 7 per cent to 52.8 million tonnes for the current calendar year. Market deficit was estimated at around 0.7 million tonnes owing to capacity cuts in many large producing countries.

While aluminium prices have jumped during the September quarter to $1988 a tonne from $1801 a tonne in the previous quarter, the metal fell in September probably due to 0.5 million tonnes surplus reported by Chinese authorities. This surplus, however, was more than offset by around 1.2 million tonnes deficit elsewhere.

"We expect nickel prices to trade lower as supply concerns have started to ease with rising output from China and delayed ban from Philippines," said Mathur.

Nickel entered a bear market last month amid a slowdown in China, the largest metals consumer, and as stockpiles ballooned to a record.

Source:  BusinessStandard