GLOBAL METAL PRICES SURGE ON MAN­U­FAC­TUR­ING GROWTH

Financial Chronicle - - RISING METTAL STOCKS - ASH­WIN J PUNNEN

The prices of copper, alu­minium and zinc were sup­ported by sta­ble de­mand, sup­ply-re­lated re­forms and a weak dol­lar

IN­TER­NA­TIONAL metal prices have shot up in re­cent months on the back of a strong pick up in global man­u­fac­tur­ing ac­tiv­ity, a weaker dol­lar and pro­duc­tion dis­rup­tion lead­ing to prices of steel, copper, alu­mina and zinc gain­ing by 25-35 per cent dur­ing the year.

The Gold­man Sachs Com­mod­ity In­dex (GSCI), LME (Lon­don Metal Ex­change) and GSCI In­dus­trial Me­tals In­dex have ap­pre­ci­ated by 28-35 per cent over the past one year.

Ac­cord­ing to an­a­lysts, the surge in metal prices is mainly driven by im­proved man­u­fac­tur­ing ac­tiv­ity glob­ally since the sec­ond half of 2016. The global man­u­fac­tur­ing Pur­chas­ing Man­agers’ In­dex (PMI) gained 0.1 point to 52.7 in July 2017 and the in­dex stood over 52 lev­els for the tenth con­sec­u­tive month.

PRICE AP­PRE­CI­A­TION

Global com­mod­ity indices have gained sub­stan­tially as the non-fer­rous metal seg­ment has seen a sharp ap­pre­ci­a­tion in prices in the last few months, due to im­prove­ment in macroe­co­nomic fac­tors and rise in de­mand.

The prices of copper, alu­minium and zinc were sup­ported by sta­ble de­mand, sup­ply-re­lated re­forms and a weak dol­lar. Copper prices have sharply ap­pre­ci­ated through­out the sec­ond quar­ter of CY2017 with prices mov­ing up by 16 per cent year to date. Av­er­age copper prices for the first seven months of this year stood at $5,810 per tonne, an in­crease of 23 per cent year-on-year.

Jefferies re­cently said in a re­port, “We have been bullish on copper due to a com­bi­na­tion of struc­tural sup­ply con­straints and grow­ing global de­mand. The elec­tric ve­hi­cle revo­lu­tion now also pro­vides a ma­jor new source of ad­di­tional sec­u­lar de­mand growth. We ex­pect a mul­ti­year pe­riod of grow­ing deficits in the copper mar­ket to lead to a higher copper price.”

Sim­i­larly, alu­minium has ral­lied 24 per cent in a year on ex­pec­ta­tions of China ca­pac­ity and pro­duc­tion cuts. Alu­minium ca­pac­ity growth in China is likely to slow down to 2-3 per cent in 2017/8E while de­mand ex­pec­ta­tions stood at 6-8 per cent sug­gest­ing a rise in LME prices. The av­er­age LME alu­minium prices for the first seven months of this year hov­ered around $1,890 per tonne. Zinc prices are ex­pected to find sup­port due to the global deficit and low in­ven­to­ries. It is ex­pected that a global zinc mar­ket deficit of 226,000 tons for 2017.

An­a­lysts ex­pect metal prices to stay at el­e­vated lev­els on ac­count of a com­bi­na­tion of fac­tors like global growth out­look, trade growth and sup­ply dis­rup­tions.

BASE ME­TALS RALLY

Kay­nat Chain­wala, re­search an­a­lyst-base me­tals, An­gel Com­modi­ties Broking said, “Alu­minium is lead­ing the base me­tals rally as strong in­dus­trial ac­tiv­ity in China boosted de­mand prospects. Alu­minium on the LME is trad­ing at $2138/t, high­est since Fe­bru­ary 2013 while it has surged to a nine-year high of Rs 136.45/kg, on the MCX. China’s Caixin man­u­fac­tur­ing PMI rose to a six-month high in Au­gust, dis­miss­ing fears of a tighter credit and cool­ing prop­erty mar­ket in­duced slow­down.”

She added that the spill over from the up­side in steel prices is re­flect­ing in base me­tals. Steel prices hov­ered near the high­est since 2013 af­ter a state­ment from China’s en­vi­ron­ment min­istry that the main­land na­tion plans to con­duct 15 rounds of inspections dur­ing its new cam­paign to curb smog in the pe­riod start­ing Septem­ber 1 and con­tinue un­til the end of March 2018. As a re­sult, Nickel prices surged to nine-month highs of $11985/t on the LME and Rs 765.6/kg on the MCX. Zinc and copper wit­nessed mar­ginal up­side, but con­tinue to be near mul­ti­year high lev­els, Chain­wala noted.

Man­u­fac­tur­ing ac­tiv­ity in both the US and the Eu­ro­zone re­mained strong. Ex­perts said the growth has been largely broad-based and re­flected pos­i­tive con­tri­bu­tions from all com­po­nents, es­pe­cially the en­gine of growth, con­sumer spend­ing, as well as pri­vate in­vest­ment. Apart from that, the price surge is sup­ported by a pick up in man­u­fac­tur­ing ac­tiv­ity in China which has been con­sis­tent since the be­gin­ning of this year.

The Chi­nese econ­omy clocked 6.9 per cent growth in the sec­ond quar­ter of 2017 out­pac­ing the govern­ment’s tar­get of 6.5 per cent for 2017. A weaker dol­lar is also sup­port­ing the surge in metal prices as the GSCI and the Dol­lar In­dex are in­versely pro­por­tion­ate. Ex­perts said this re­la­tion­ship has largely played out in the re­cent past. From the Novem­ber 2016 highs, the dol­lar has fallen by 10 per cent Au­gust 2017. Ex­perts said the de­mand from the US, the Euro­pean Union and China is likely to re­main strong on ac­count of cap­i­tal in­vest­ments and macro fac­tors, while the down­side risk ap­pears to be on­go­ing geopo­lit­i­cal fac­tors.

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