Saturday, October 25, 2014

Demand concerns put pressure on base metals

Demand concerns put pressure on base metals
The global base metals market is currently facing strong headwinds that impact price performance.

In 2012 and 2013, a combination of expanding liquidity, weakening dollar, China’s voracious appetite for consumption and slowly improving growth prospects helped a strong uptick in demand. 

Although selective, investor interest in base metals was healthy.
Things are different now. This year has not been a great one for metals market.

In recent months, some of the important drivers have reversed direction while new challenges have emerged. Shrinking liquidity following the US Fed’s tapering programme, a steadily firming dollar, slowing industrial production in some of the major economies and lower inflation expectations have combined to cap the upside and force market prices down.

Currently, macroeconomic risks are casting a shadow – concerns over growth being the most important.
There is apprehension of demand slowdown. As the mover and shaker of the world commodity market, China’s import and consumption of metals exert a profound impact.

With construction activity in the Asian major slowing, there are fresh concerns over metals’ demand growth.

Another reason is the high level of corporate debt in China.

Although inflation is under control and employment healthy, the Chinese government seems to be worried about corporate debt and has, therefore, asked State-owned enterprises to fund purchases through cash flow rather than on credit.

According to experts, the metals and mining sector in China is not in a good shape. Declining investment growth and falling property prices have generated fears that the 2015 GDP growth target may be lowered. 

There are demand concerns is other regions too. Although US recovery is back on track, global growth is still uneven. Demand in Europe and Japan is still fragile.

Of course, many emerging markets show signs of stabilising with activities being adjusted to global realities. The US Fed’s monetary policy normalisation is seen as another uncertainty as expectations differ about the timeframe. Geopolitical tensions may have somewhat receded, but the Russia-Ukraine stand-off and insurgency in Syria and Iraq can potentially create a turmoil.

Simply put, the global environment is full of strong pulls and pressures.

As a result, many commodities are trading close to their cost curve.

Some of the less-efficient producers have shut down. It has also prompted a cut in capacity expansion.

Collapsing metal prices deter fresh investment while investor risk appetite wanes.

Supply demand fundamentals have begun to assert themselves.

An exception to the general trend of falling base metals prices is nickel whose price surge has been triggered by Indonesian ban on export of unprocessed raw material. Zinc is another exception because of tightening supplies.

Despite all the uncertainties surrounding the base metals market, on current reckoning, nickel will turn out to be a winner next year followed at a distance by zinc.

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