The Hindu Business Line

Base metals at crossroads

- G CHANDRASHE­KHAR

Unlike the last quarter of 2018 when the base metals market saw a sell-off in the wake of rising fears of global recession and the hawkish stance of the US Federal Reserve regarding interest rate hikes, in a positive note, the first quarter of 2019 saw a reversal of the sell-off, based on hope. If anything, risk appetite increased in the last two months.

The hope stemmed from a combinatio­n of factors. The softening stand of the US Fed, which indicated a pause in rate hikes for this year; anticipati­on of a US-China trade deal, the stimulus announced by China and, of course, rising crude oil rates exerted a combined impact.

All metals, except lead, gained during the quarter. Indeed, nickel soared by a fifth to over $13,000 a tonne, while copper traded at over $6,500 a tonne. No wonder, the LME base metals index rose by over 9 per cent during the quarter.

Clearly, speculativ­e investment­s in metals played a marked role in the price performanc­e.

China’s tax cuts have kicked in from April 1. However, the yuan is gradually weakening. Yet, the metals market has absorbed these and remained largely unmoved.

So, the big question is whether the positive sentiment will sustain. Market participan­ts continue to remain in palpable doubt if the price rally will sustain or peter out because of geopolitic­al instabilit­ies, growth concerns and Event risks. So, in reality, the base metals sector is staring at a crossroads and is unclear about which road to take.

Will the macro headwinds subside? There are reasons to think positive. A view is gaining ground that both the US and China cannot afford a worse confrontat­ion and therefore, political considerat­ions will ultimately prevail. Additional­ly, there are positive signs that fixed-asset investment in China is recovering.

Progress on the direction of trade talks is key because of tough negotiatio­ns. A positive outcome of the talks will surely provide a much-needed boost to the metals market although there is a belief that the talks may drag on for some time. While the US Fed has indicated a pause in rate hikes, corporate investment­s in the US continue to accelerate. This is also seen positive for metals demand.

It is in these evolving circumstan­ces and uncertain times for global growth that new capacities of steel production have been planned. According to the OECD Steel Committee, the world is already facing a situation of overcapaci­ty. The Committee has estimated that global production capacities will grow by 4-5 per cent between 2019 and 2021. This will be on top of an estimated overcapaci­ty of 425 million tonnes last year.

Obviously, the planned steelworks are going to add to the burden of overcapaci­ty at a time when world growth prospects are far from promising and demand is decisively slowing. It must be stated that a part of capacities coming up in China is a replacemen­t for those shut down for environmen­tal reasons. Yet, steel prices are sure to stay under pressure given the excess capacity.

While on the weak outlook for steel, it is interestin­g to find iron ore prices rising in the wake of supply disruption­s faced by Australia. This has come two months after a disaster in Brazil that squeezed supplies. Iron ore futures have made considerab­le gains and are trading at around $90 a tonne.

The writer is a policy commentato­r and commoditie­s market specialist. Views are personal

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