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Course Correction

August 2016

Bullish sentiment returns in base metals. But will it last?

Base metal prices recovered 6.8% QoQ (calculated using the representative commodity pack outlined in the Table next page); against a -0.1% and -7.8% growth in the preceding 2 quarters. This growth is reflected by another critical indicator around global trade – the Baltic Dry index, which has recovered sharply over the last 3 months moving from the multi-year lows of 290 in February 2016.

The growth in the sector has come on the back of weakness recorded in the US Dollar and some degree of recovery within the Chinese economy, on account of a stimulus push by the Government. The Chinese GDP registered a growth of 6.7% over the 2nd quarter.


According to preliminary data recently compiled by the International Lead and Zinc Study Group, the global market for refined zinc metal was in surplus by 24 kilotons (kt) from January to April 2016 with total reported inventories rising by 32kt over the same period. A reduction in global zinc mine production of 8.1% was primarily due to decreases in Australia, India, Ireland, Peru and the United States. Rises in refined zinc metal production in the Republic of Korea and Namibia were more than balanced by reductions in India, Japan and the United States resulting in an overall global fall of 3.4%.

Zinc prices are up ~38% for the year-to-date at the current level of USD 2205 per metric ton. The metal seems clearly to be in a strong bull grip, with prices zooming to over 1 year high. It is prudent to keep a tab on LME inventories for the metal which as per the latest update stand at 438,425 tonnes, up from 380,450 tonnes at the end of May.

Another metal seeing a surge in inventories, copper has been largely moving in a sideways trend. Since the latter part of 2015. Copper sitting in warehouses licensed by the London Metal Exchange has jumped to the highest level in recent months, totalling 231,275 tonnes as per latest estimates, up from 140,000 tonnes in April. As outlined in our previous commentary, the metal continues to be marked by lower demand predictions and favorable supply estimates. Bank of America Merrill Lynch, in its recently released report expects this trend to weigh on prices going into 2017 – prices are likely to average USD 4747/mt, lower than this year’s estimate of USD 4882/mt.

In the immediate short term, recent reports of choppy seas off the coast of Chile, the largest copper producer, is leading widespread delays to copper shipments worldover. While the impact of the same is expected to buttress prices in the short-term, any long term impact is unlikely.


The buoyancy in commodity prices has helped Nickel prices recover from its lowest level in years, moving beyond the USD 10000/mt (seen in October last year) to the current level of ~USD 10,300/mt. Data released from the International Nickel Study Group showed that between January-May, the world deficit widened to 21,200 tons, as consumption grew by 4.1% to 821,200 tons but refined output slipped by 2.3% to 800,000 tons year-over-year. In summary, it would be interesting to see if the recent price recovery is the onset of a reversal of a broad downwards trend or a technical bounce back. Fitch research arm, BMI reported that it maintains its refined nickel price forecast at USD 9 000/ mt in 2016, as sustained global deficits and declining inventories were expected to support a modest price recovery up to 2020.

Aluminium prices are likely to continue moving in a range – the Japanese Aluminium Association recently outlined expectation of the metal hovering between USD 1,500 – USD 1,700 per tonne for the later half of this year as oversupply will cap further gains. Japan is Asia’s biggest importer of aluminium and the premiums for primary metal shipments it agrees to pay each quarter over the LME cash price set the benchmark for the region.

Global aluminium giant Alcoa, post its recently released quarterly earnings, reduced its deficit projections for the metal – from a projected deficit of 1.1 million mt for the year post its 1Q 2016 earnings, it now expects the global aluminum deficit at 775,000 mt in 2016.

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