Base metals hit a four-month high on Friday following seasonal demand and expectations of economic stimulus measures in China, the world's largest consumer. The upsurge is likely to continue in coming months on supportive fundamentals.
Faced with slowest economic growth since 2009, China plans to start a massive $1.1 trillion stimulus to boost its economy and bring to rescue hundreds of dwindling infrastructure projects across all sectors from mining to healthcare. The Chinese government launched its first economic stimulus with $586 billion in 2008.
Following investment booster to the infrastructure projects, base metals consumption is expected to rise in coming months. Being the largest consumer in the world, economic growth in China is likely to change the trade dynamics of base metals.
"Base metals are getting support from two sides. Apart from fundamentals turning positive, seasonal demand is squeezing surpluses in the sectors like lead. At the same time, deficit is widening of copper, zinc and nickel. So, overall trend is likely to remain positive to support base metals' rise in coming months," said Gnanasekar Thiagarajan, Director, Commtrendz Research.
Meanwhile, copper hit a session high $6,375 but, settled at $6,362 on Friday. Lead followed suit to touch its highest from September at $2,153 before settling at $2,139. Aluminium hit its highest since December at $1932. But, a marginal profit booking pulled down its price to $1919 in cash.
"Copper prices are at or around their highs for the year. As expected, numerous mining companies have seen their first quarter mined copper output negatively affected by a variety of unexpected outages. To this we can add expected outages in Zambia in the second quarter after this week's failure of the country's electricity grid. After a weak first quarter, Chinese demand appears to be improving, with SHFE stockpiles falling rapidly. Zinc prices are at their highest since Oct-Dec quarter of 2014, as the market contemplates imminent closure of Century and Lisheen mines in the third quarter. On top of that, the zinc forward curve has moved from contango towards backwardation," said Nic Brown, Head of Commodities Research at global consultancy Natixis.
Nickel prices have been supported by the strike at BHP's Cerro Matoso. Nevertheless, with the return of Philippine nickel ore exports, Chinese laterite ore stocks are now beginning to increase once again, and LME nickel stockpiles are still rising. Also, lead was pushed higher in recent weeks after a large proportion of available London Metal Exchange (LME) stocks were withdrawn by a single buyer. Nevertheless, the lead market suggests that Chinese fundamentals will continue to deteriorate as e-bike manufacturers drift inexorably from lead-acid to lithium-ion batteries, helping to boost scrap supply even as demand slows.
"It is arguable that some of the upward momentum in base metal prices may be related to the recent weakness of the dollar. If the Fed is correct in thinking that the relapse in the US economy during Q1 is only transitory, any weakness in the dollar may prove to be brief," Brown added.
Meanwhile, Naveen Mathur, Associate Director (Commodities & Currencies), Angel Broking, believes, "Currently, base metals are trading positive as string of weak economic data from China has boosted hopes of additional stimulus from the biggest consumer. Providing additional support to prices is recent Federal Open Market Committee (FOMC) statement which remained largely unchanged from prior statement with prime factors being maximum employment and two percent inflation target although it did not rule out any meeting for a policy change. In addition, improvement in Greece situation after reshuffling of Greek teams which are negotiating with creditors is supportive. Moreover, zinc and lead prices are buoyed by significant mine closures including Century mines."
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