Strong demand outlook to lend support to aluminum prices in 2015

The aluminum oversupply will be offset by strong demand growth outlook, lending support to aluminum prices in 2015, says a recent study report by Capital Economics.

The addition of capacities in the Middle East and China has lead to surplus in aluminum market. Aluminum production by China grew 6% in 2013. The production growth is expected to reach 10% in China this year.

According to Capital Economics, the increased supply of aluminum will be offset by the rising aluminum demand from traditional consuming sectors. The recovering automotive and construction sector in the developed world, especially the US looks positive for aluminum. Also, the rise in production of consumer goods from China will keep the aluminum demand high.

Further, the supply surplus will reduce considerably in 2015 as China curtails production at non-performing smelters. Major aluminum producers elsewhere have announced production cuts. The US –based Alcoa plans to cut one-fifth of its capacity by 2015.

The report forecasts that the aluminum price is likely to reach $2,000 per mt by end-2015, which is nearly 12% higher than the current LME price for the metal.

Participation of banks in commodity markets long overdue

They enable even small farmers to reap the benefits of hedging

Banks are not allowed to participate in the Indian commodity derivatives markets. Such non-participation of the most important financial institution of the country – banks – is an important missing link in the evolution of this market in India.

While much has been talked about in various contexts recommending banks’ participation, the latest Report of a Finance Ministry committee suggesting steps to fulfill the objectives of price discovery and risk management in the commodity derivatives market, says: “… One way to reduce the cost of capital for the commodities trader is, to make banks … an integral part of trading in commodity derivatives.”

It is a fact that there are regulatory restrictions on part of banks too that restrict their participations in commodity futures markets. But, the fact remains that their participation in commodity exchanges is a win-win situation for all: it helps the banks, it helps commodity markets,and in the process, it helps the economy as a whole.

Risk management platform

While the above-mentioned report recognises that banks’ participations in the commodity derivatives market will contribute to the depth and width of the market, what this process also contributes to is the availability of an unparalleled risk management platform for the banks themselves, as banks also need to manage risks arising from commodity price volatility.

Thanks to globalisation of the Indian economy and business expansion of Indian banks, their exposure to rising commodity price volatility is significantly high – 19 per cent according to some estimates made in 2011-12. Yet, while banks have been allowed to manage other risks in their portfolios, they do not have any mechanism to hedge commodity price risk in an effective and transparent manner, barred as they are from entering the commodity derivatives market.

Intermediation, aggregation

Further, banks can act as intermediaries and aggregators, facilitating the risk management actions of farmers and other small players who on their own may find considerable barriers to enter this market. World-over, there are examples galore on banks’ participation in exchange-traded commodity derivatives market on behalf of farmers, enabling the latter manage risk exposure better and increase their incomes.

Mention may be made of Rabobank’s intervention in Tanzania and Nicaragua and Banco do Brasil’s intervention in the Brazilian agricultural market through issue of exchange-traded Cedula Producto Rural contracts. Many of these interventions are made through designing and offering customised hedging solutions fulfilling the requirements of farmers.

Besides, by aggregating small participants, banks enable even small farmers to reap the benefits of hedging. On a similar note, the non-farm sector, especially the small and medium enterprises, too can be a significant beneficiary of the commodity futures market, which can be increased manifold by the facilitative role provided by banks.

Releasing scarce resources

At the micro level, with a comprehensive risk management policy that encompasses commodity price risks, banks’ financial and human resources can be freed to cater to more important strategic functions. Under the evolving international regulatory regime where norms on credit and provisioning are increasingly being linked to risk assessment of banks’ portfolios, hedging against commodity price movement will actually contribute to freeing of financial resources – enabling not just achievement of priority sector targets for Indian banks, but also their overall business expansion.

Through focused deployment of appropriate credit products, these developments could, at the macro level, go a long way in smoothening and quickening the credit cycle, thereby enhancing productivity of credit.

Better liquidity, hedging

From the commodity market’s perspective, banks’ participation will help in providing the market with the much-needed long-term traction. This will help the long-term hedgers’ participation on the one hand, by reducing the overall costs of transactions (including the impact costs), and will help enhancing the hedging efficiency. There has often been a complaint from large corporates about lack of long-term traction in the Indian comexes, which inhibit their hedging efficacy. Banks’ participation will help ameliorate that concern.

A “Pareto” Improvement

Here lies the “Pareto” improvement through banks’ participation in Indian comexes. On the one hand, it will be in the interest of banks’ own sustainable growth.

On the other hand, it will help them achieve the goal of inclusive growth through market inclusion of millions of commodity producers. Thus, banks’ participation in the commodity derivatives market does not stand as a policy option; it is a fundamental economic need of the day that is long overdue

Barclays changes view on Indian Rupee after election

Barclays calls the Indian rupee one of its favorite high-yielding emerging-market currencies. The bank now sees the Indian currency at 58 rupees to the dollar in one and three months, compared to 60 previously. 

Barclays said that its more constructive rupee view reflects a combination of supportive factors including, an election result has encouraged portfolio inflows, a narrowing current account deficit and a globally supportive environment for carry trades. 

“Central-bank intervention will likely continue to limit the pace of INR appreciation against the USD, but the large size of portfolio flows implies that modest appreciation is likely to be tolerated by the RBI (Reserve Bank of India), in our view,” said Barclays. 

Barclays continues to think that a renewed bout of INR depreciation is unlikely, given the much-improved fundamental backdrop, led by a markedly smaller current account deficit, higher FX reserves, largely range-bound inflation and enhanced RBI policy credibility.

Rupee was as muscular as 69.22 rupees back in August, and the weak Indian currency at the time was one of the factors – along with gold-import restrictions-- blamed for reduced gold buying in the country, since a weak rupee makes gold more expensive for Indians.

Societe Generale remains bullish on Zinc

Many market participants in the base-metals arena looked favorably upon zinc, said Robin Bhar, metals analyst with Societe Generale. 

“It is anticipated that recent and expected closures of a number of zinc mines over this year and next would lead to a supply crunch underpinning a rally in prices,” said Bhar, outlining factors discussed at a recent zinc conference in Istanbul. Bhar cited closures and expected closures in Canada, Ireland and Australia. 

However, mine closures are the only known certainty. There are many unknowns regarding zinc’s supply/demand fundamentals, such as demand growth, substitution, how much higher prices would incentive new projects and the Chinese mining sector. 

“A supply crunch does look inevitable but it’s likely magnitude and duration is highly uncertain and subject to a variety of factors,” Bhar added.

Chart Of The Day: Global Youth Unemployment

We have some bad news... for Africa: according to the latest data released by the International Labor Organization, your youth unemployment problem is almost as bad as that of Europe.

Maybe more to the point, just what is it about those bracing Mediterranean sea breezes (not to mention mandated Eurozone "political capital" and relentlessly liberating - of one's job - globallization) that makes the young people in the adjoining countries choose to do pretty much anything but work?

Global Nickel market surplus dropped over 50% over the year in March: INSG

According to International Nickel Study Group (INSG), the surplus in global nickel market dropped significantly during the month of March this year. The global nickel market surplus totaled 3,600 tons in March this year. This is 52.6% down when compared with the surplus data during March last year. The global nickel market surplus during March 2013 was 7,600 tons.

The nickel surplus in March dropped when compared with the previous month. The global nickel surplus fell by 25% month-on-month during March. The production of Nickel during the month of February this year exceeded the monthly demand by 4,800 tons.

INSG notes that that the global nickel surplus during the three-month period from January to March this year dropped significantly over the previous year. The surplus narrowed to almost one-third during the initial three-month period of the year. The global surplus of nickel dropped from 38,900 tons during January to March 2013 to 13,400 tons during the corresponding three-month period this year.

The International Nickel Study Group (INSG) - an autonomous, intergovernmental organization established in 1990 and located in Lisbon, Portugal, is responsible for collection and publication of improved and latest statistics on world nickel market.

Declining supply levels likely to propel zinc prices higher

With market deficit set to worsen, the zinc prices may reach new heights in the near future. Analysts see bright chances of zinc outperforming the metal pack as nickel did in 2014. The Russian crisis and the Indonesian ore ban saw nickel prices surging nearly 40% YTD.

The declining supply levels are expected to drive the zinc prices higher. According to BofA Merrill Lynch estimates, the zinc prices are poised for a 15% upside from current levels by 2015. The zinc price is all set to breach $2,400 per tonne as early as next year. The zinc prices have remained almost flat since start of the year at around $2,100 per tonne.

MMG Limited that operates Century Mine in Queensland have already announced that the zinc production from their mines could drop to 465,000 tonnes this year, as against the 488,000 tonnes during 2013 and 515,000 tonnes during 2012. A series of mine closures scheduled for the second half of the year may aggravate the supply deficit.

On the other hand, the global economic recovery has bolstered the demand for zinc. The metal is mainly used for galvanizing purposes by the steel industry. Zinc is also used extensively in battery production industry and automobile industry. According to report released by the International Lead and Zinc Study Group (ILZSG), the apparent demand for zinc in China grew by 7.6% in 2013. Incidentally, China accounts for almost half of the global zinc consumption.

According to industry sources, the zinc output from mines is expected to remain subdued in the near future. On the other hand, global demand for zinc is poised to scale new heights. This could drive the zinc prices much higher, thus making it the star of the base metal pack.