A frantic sell off seen in last week with global equity markets tumbled while commodities collapsed with industrial metals melt down heavily. A bloodbath seen in base metals as gloomy outlook for the world economy weighed on commodities with investors concerned that stuttering recovery will hammer demand for industrial metals. The recent sell off is a combination of no QE-3, low economic growth, debt concerns in Greece, Spain and now Italy, weaker production numbers from worldwide like China and Europe and fear of double dip recession. The world economy is in a danger zone and path of recovery is narrowing.

Base metals prices entered in to bear territory and came under pressure after US Federal Reserve warned of significant" dangers to the US economy even as it unveiled a $400 billion long-term debt purchase plan. Markets were disappointed after fed announced not to print money and pump in the markets as they will replace short term debt in their portfolio with longer term treasuries, this is called "Operation Twist”.

Further negative outlook of global growth by International Monetary Fund also weighed on markets. IMF cut its outlook for global growth and warning the U.S. and European economies could slip back into recession. IMF cut its global growth forecast to 4% for this year and next after earlier projection of 4.3% for 2011 and 4.5% for 2012.

Copper, the bellwether for all base metals, is called Dr Copper as it is believed to forecast the world’s economic health, is sensitive to the changes in world economic outlook. Red metal, copper remained in red zone as prices fell by more than 30 percent with LME copper fell to $6800, its lowest level in this year from its lifetime high of $10,190. Steel material nickel also followed the copper’s way, also tumbled 20 percent and reached below $17000. Battery material lead reached to $1900 levels with prices erased by more than 25 percent in this year. Zinc prices on London plunged by 25 percent with prices fell below $1900 from $2300 levels.

For the rest of the year, base metals prices are expected to remain under pressure as looking to macroeconomic scenario and crisis situations in US, Europe’s sovereign-debt crisis and the prospects for slower growth in China, it is hard for industrial metals to trade higher. Copper has only positive fundamentals however nickel, lead and zinc have lackluster demand-supply scenario. We are not extremely bullish for copper but for this year we may see some recovery and lower level buying.

 

BASE METAL COMPLEX – LME PRICES & LME STOCKS

COPPER

In 2011, copper prices have corrected by more than 25 percent with stocks also increased by nearly 20 percent. LME copper price made the lifetime high of $ 10,190/t while it made the low of $6800 in last week. Prices are down 30 percent from lifetime high. LME stocks reached above 463,000 tonnes from 377,000 tonnes which is up by 19 percent.

NICKEL

Nickel remained the top loser in the metal complex with prices down by almost 30 percent in the current year despite the drawdown of stocks. LME stocks are down by more than 28 percent, stocks reached to 97,000 tonnes from 135000 tonnes in 2011. LME nickel price made the high of $29,425/t while tumbled to low of $16800 in last week of the September.

Copper : Buy or Break ?

Base metals movements continue to be directed by global macroeconomic events such as developments in the euro zone debt crisis, US economic data and Chinese monetary policy. Chinese government fight against rising inflation remains in focus throughout the month and quarter which remained negative for metals prices. US economic data painted gloomy picture raised the doubts on recovery while in the last the Greek parliament approved detailed austerity and privatization bills to secure emergency funds and avert imminent bankruptcy.

In the month of June, LME metal counter witnessed range bound movement with more on negative bias however recovered at the end on Greece’s positive news. Copper reached above $9400 on technical triangle break out which spurred the buying in metal, finishing at $9430 with monthly gain of two percent while on quarterly basis it ends in break even zone. Stainless steel material, nickel was the only loser in metal complex, settled with more than 10 percent loss in second quarter on weak fundamentals however it was the only metals which stocks decrease by more than 15 percent in the same period. Battery material Lead, managed to settle near $2700 with more than 6 percent gain in last month on persistent environmental issues in China over lead poisoning. Zinc prices also followed lead rally and end at $2365, with four percent gain; however both metals ended with no gain-no pain in last quarter.

COPPER

Copper price continue to be directed by global macroeconomic events such as developments in the euro zone debt crisis, US economic data and Chinese monetary policy. Copper prices are still far away from its life time high of $10190 as few factors contributing to the retreat including Chinese monetary move to tighten monetary policy, lackluster US economic numbers suggesting a stalling recovery and growing concerns over the financial instability in the Euro zone. Market movements remained muted on lack of fresh fundamentals which insisted LME copper to trade between $8700 to $9300. Fundamentals remain unchanged as supply shortage still there in the market. So, which factors will determine the upcoming trend in prices? Many factors affect the price such as US economic outlook, China’s credit environment, Euro zone’s financial stability, demand from emerging nations and last but not the least is supply scenario.

Considering Budget deficit, a lingering dilemma for US economy, apart from the deficit there has been a consistent stream of data suggesting that the economic recovery is losing momentum. Sluggish manufacturing numbers, poor job data, tumbling housing starts, lackluster consumer spending and poor consumer confidence have pained a gloomy picture of the US economy.

Another concern is China’s credit environment as to control the rising inflation, China raised reserve requirement ratio to 21.5 percent, sixth times such increase this year to tame the inflation which reached to 5.5 percent at 34 month high. Euro zone financial instability remained the vital factor to direct the price however Greek parliament passed the austerity plan.

Demand from emerging nations such as China, India, Korea, Indonesia and more grew and expected to grow further very well due to rapid development in end-use sectors such as telecommunications, power, equipment manufacturing, automobiles, construction and consumer goods.

So, overall after studying above factors we expect copper to remain positive in the coming period. Supply shortage in the next year and expecting improvement in demand may push copper prices to trade near $9800 in the next month. Technically, copper has strong support at $9000 and $8700 while resistance lies at $9800. MCX Copper price is expected to trade positive for the next month with target range of 440-450 and support at 400.

NICKEL

Price of nickel has been rising since 2005 on the back of emerging market demand with London nickel price reached above $29000/tonne to a three year high in February. However since then prices have tumbled more than 25 percent and have become the worst performer on LME. Prices fell towards $21,650/tonne in last month, settled at $22,500 with more than 5 percent loss. 

Demand from the emerging markets remained positive and since 2005 increased demand from China, Brazil and other developing markets has driven the nickel demand high and at that time miners couldn’t keep the supply with demand. Construction delays, technology setbacks and higher manpower costs have kept global nickel production stagnant from 2008-2010. During that period, lower supply could not catch up the rising demand resulted in boosted for nickel prices. But then after supply has increased and sufficiently catch up the demand because after years of delays several new mines have come online. During the start of the year, Vale and Anglo American launched production at new sites, while Xstrata plans to start production in New Caledonia next year. In fact, Vale is so optimistic about its new projects that it has projected a 56 percent increase in nickel output this year alone. Where, more than half of this supply comes from China as this year china boosted output of pig iron by 48 percent. Indeed, Macquarie research project that global nickel mine production should rise 10.1 percent this year, and 11.3 percent in 2012- the biggest increase in 17 years.

It’s not a surprise that nickel market will turn to surplus from deficit in nest year as International Nickel Study Group has predicted a massive nickel surplus. In April, it projected the 2011 nickel market would see a surplus of 60,000 tonnes, compared with last year’s 30,000 tonne deficit, which would be the highest surplus in four years.

Now question arise, how to play nickel? Does it have much further to fall or potential to recover?  Fundamentally, supply side is stronger than demand which could dampen sentiments; however demand from western economies and stainless steel demand from Japanese automakers are expected to recover which may limit the further downside in nickel prices. So, overall we don’t expect prices to remain strongly bullish but stability around $22000 is expected in the next month. MCX Nickel prices are expected to trade between 1000-1100 in next month.

LEAD & ZINC

Environmental issues have always affected Lead industry, especially in recent time persistent efforts from China to control pollution over concerns of lead poisoning. China is a largest producer of metal and the country has large amount of such plants. Recently, China is administering shutdowns of such plants due to rising cases of lead poisoning and in late May the Chinese government shut down lead battery and lead recycling plants. These shutdowns may decrease the demand from plants however this could also raise the problem of supply as supply of refined lead may reduce which may bring fundamental back into balance even might initiate a turnabout in prices of lead. China’s top planning ministry, the National Development and Reform Commission plans to close down 585,500 tonnes of lead smelting capacity this year as part of a wider crackdown on 18 heavy and polluting industries. If the closures will be longer at the large facilities the impact will be deeper on lead demand. However, not major impact is projected on lead demand in short term due to higher stocks at warehouses and large surplus but it definitely affects the supply of refined lead in long term.

Modest recovery seen in Zinc price on macroeconomic developments as at the end positive news from euro zone spurred the sentiments. LME Zinc traded in a narrow range throughout the month on lack of fresh fundamentals, however it settled near $2350/tonne, up by nearly 4 percent from previous settlement. Concerns about the slower growth in China and Western nations are impacting on zinc demand as it is highly correlated with industrial production. Due to power issues in China smelters are starting to cut production and margins get squeeze due to lower price. Power shortages and government enforced closures may slow the output growth.

In the next month we expect some improvement in lead prices where resistance lies at $2900 and support at $2400. MCX lead prices may trade near 125 level in next month. Zinc facing resistance at $2500 and support lies at $2150. Prices are expected to consolidate at current levels where MCX Zinc price may see level on 112 on upper side and 100 at bottom side. 

The Story of Copper and its high Expectations !!!

Has the Red Metal turned Red?

Widespread expectations of copper to reach above $11,000 remained muted with sluggish spot market prices coupled with continuously tight credit environment and geopolitical tensions kept the sentiments brittle. The factors recently confusing the investor mind are inflation, geopolitical tensions and Japan's natural disaster. Chinese persistent watchdog on inflation and escalating unrest in Libya assisted bears to acquire the ground temporarily. Recently with the continuous effort to curb inflation, Chinese copper imports have witnessed a sharp decline turned copper cash market to discount form premium. However, vital economic indicators from the major economies saw some improvement, helping market to sustain higher.

Copper posted a golden performance in last year with prices climbed to all time high, broke $10,000 mark on LME, posting more than 30 percent gain in last year as macroeconomic and fundamentals factors remained positive, supported the prices. Due to Chinese restocking, stocks at major warehouses reported sharp decline with LME stocks dropped by 25 percent in the last year. Weaker dollar against the major currency also added positive cues. Further, shortage of supply from major mines and improving demand will be the major cues in the coming quarter as demand from emerging countries and western countries are expected to improve. From the following factors copper price will be determined?

Where will Copper go as Japan's Economy Rebuilds?

Japan, the world's third largest economy, has been hit hard by the 8.9 magnitude quake that struck the northeast coast of Japan, trigged a tsunami resulted power plants, oil refiners and ports to temporarily shut activities. The quake's aftermath is also being felt in the financial markets. If we look for copper, then domestic demand for copper as well as other base metals will drop for short time as Japan's manufacturing plants remain closed due to quake damage amid power supply disruptions, however in long term demand may expected to rise.

Global copper product supply could be affected on the closure of refineries and plants in Japan as Japan is the second buyer of copper ore after China and it supplies finished products to manufactures around the world. Mitsubishi Materials Corp, Japan's third largest copper producer has halted production in its Fukushima prefecture smelter. Japan was expected to produce 1.6 million tonnes of refined copper in 2011, about 7.6 percent of world output. Looking to consumption side, Japan has typically consumed around 5 percent of the world's copper however the percentage will certainly increase over the next few years as reconstruction begins and country's infrastructure and housing will rebuilt.

Once the natural crisis gets over reconstruction would take place and rebuilding effort will require Japan to purchase huge amounts of industrial metals as it would need copper to replace electrical power cables damaged by tsunami, Aluminium would be required for household appliances, Zinc for galvanized steel, Lead for battery consumption and nickel to make stainless steel for larger infrastructure.

Oil & Copper divergence: Is it Bearish for copper?

Recent price drop in copper is to be also attributed to geopolitical tensions as the unrest in North Africa and Middle East raised the fear of global recovery. Fear of oil supply kicked the crude oil prices raising the fear of inflation. Of course the oil price has risen and copper price has fallen both of these are not unrelated as the fear of rising oil prices will dampen the industrial growth and economic recovery which may depress the copper demand.

There is a short term adverse effect on copper due to rising oil prices which we called a sentiment effect. However in the long term if the unrest eventually spreads to Saudi Arabia and other nations then we will see much higher oil prices and more volatility. But the word 'sustained' is important as if crude prices are likely to sustain above $110 for the next six months or the year then we can see the impact on inflation and demand destruction.

Copper, China & Inflation

China, the world's largest copper consumer and its economy has greater impact on copper prices as China and the health of its economy directly influences what goes on in the copper market. Right now, the focus remains on inflation. Concerns that Chinese government is taming inflationary pressures means every credit tightening or interest rate increase is viewed as an impending slow down depressing prices. Any result in monetary policy directly affects the copper prices as metals prices are sensitive to even small percentage point moves in perceived changes.

Chinese government has stated its preference to cap 2011 inflation at an average of 4 percent and it's so far from the current levels with current inflation rate stood at 4.9 percent against the previous level of 4.6 percent. To control the inflation, Chinese government has been rising interest rates in baby steps as China raised interest rates third time since October 2010 resulting one year lending rate to stood at 6.06% and deposit rate at 3.0 percent. The People's Bank of China also raised bank reserve requirements to record high at 20 percent. China has raised figures eight times by a total of 4 percentage points since January 2009. With every effort to tighten monetary policy could limit the economic growth and adversely affect the copper imports and demand for industrial metal. China producer manufacturing index remained under pressure with figures stood at 52.2 against the high level of 54.1 seen in December. The series of tightening measures by the central bank also had impact on loan growth as China's banks issued less than CNY600 billion, 91.3 billion in US dollar term, worth of new yuan loans in February, well below January's CNY1.04 trillion.

Supply Deficit - the only driver behind bull story

Analysts have already predicted supply shortage of copper for 2011 as there is no expectation of new supply this year however there is a potential for supply disruptions from aging mines. In 2010, copper has outperformed other base metals having posted a 30% returns. Considering the recent lack of exploration, increased demand from developing countries, declining resources like ore grades, insufficient number of new fund deposits , labor problems like strike and mine closure due to natural disaster all together resulted in shortage in supplies.

Many leading mines across the globe which were developed over two decades ago are yielding ore with less and less metal content resulting low percentage of productivity. The rate of production is declining at the world's largest copper mine as production at Escondida, the world's largest copper mine is anticipated to drop as much as 10 percent due to lower grades. Other mines like BHP Billiton and Rio tinto also suffered from production in last year. According to International Copper Study group, the refined copper market balance for the full year 2010 indicated a market deficit of about 305,000 metric tonnes compares to a surplus of 175,000 tonnes in 2009. Stronger than anticipated refined copper usage, which grew by 1.3 million tonnes (Mt), coupled with a smaller than anticipated growth in supply of 770,000 tonnes pushed the market into deficit.

In 2010, world usage of refined copper grew by around 7% to 19.4mt whereas the usage grew by 8% in Europe, 20% in Japan and 8% in US, although still usage rates are below pre crisis levels. In 2010, Chinese apparent usage increased by a more modest 4.3% from the very strong apparent usage growth of 37% in 2009, while world refined usage ex-China increased by around 8.5% in 2010. On a regional basis, usage increased in Africa by 1%, in Asia by 5.5%, in the Americas by 11%, and in Europe by 9%. Usage decreased in Oceania by 1%.

World mine production in 2010 increased by a modest 1% nearly 165,000t to 16.1 Mt and the average global mine capacity utilization rate fell to about 81% in 2010 and was at the lowest level in at least 20 years. Production in Chile, the biggest world producer, remained practically unchanged and was 2.6% below that in 2007. Output from other major producers such as Peru, the United States, Australia and Indonesia, that combined represent around 25% of total world copper mine production, decreased by an aggregated 5%.

Copper price: Inelastic to demand

There is a saying in commodities that high prices is the best cure for high price means when prices are high consumers will decrease consumption or substitute the other products, that's why, when prices of a metal rises to a certain point substitution becomes a factor. Substitution means end user may use another metals instead of copper. Substitution results in a decrease in demand which can help to correct prices. Copper primarily used in construction, cars, and electronics and for many applications there is no viable substitute, in economic term it is called a 'low elasticity of demand' or a 'demand inelastic'. That means high prices have a little influence on the quantity demanded, therefore the consumer will continue to purchase the commodity despite the high prices.

Emerging markets – the driving force behind the rally

Emerging nations demand for copper remained fairly positive as China and India are among the largest demand sources for industrial metals and responsible for copper consumption. Looking to macro factors, electricity generation figures also indicates economic growth as electricity consumption is highly correlated to manufacturing and industrial demand. According to International Energy Agency, India's power production needs to rise by 15-20% annually. Because of investment into new infrastructure India's annual copper demand is expected to more than double to near 1.5 million tonnes by 2012 up from current level of 6 lack tonnes. In 2011 China will continue to dominate global copper usage, which could rise more than 5%, and demand from western economies like from US and Europe will improve after facing a rescission period.

The annual per capita consumption of copper in India is 0.47 kg, China's 5.4 kg and the world average is 2.7 kg. China's urbanization plans and forecast GDP growth of 9.6 percent a year is expected to drive Chinese copper consumption from the current 5.4 kg/capita to an surprising 10 kg/capita by the end of the decade.

Now, question arises, where would be the copper this year, in the red or green zone? It would go lower or it's a buying opportunity? Simply, China's monetary policy will be the critical factor to determine the prices. Apart from it there are several supportive elements like increasing demand from the emerging nations will be more than make up for decreased demand from western world, and once the western economies recover, they would demand more and supply squeeze will become ever tighter. China and India being major growing economies supported the rally and will be supportive as consumption is further expected to increase. US economy recovery continues, not rapid but slow recovery, European nations may come out from recession while Japan would require more metals for reconstruction efforts after its earthquake and tsunami. Urbanization plan of China and India would also be benefited. Further year ahead supply is expected to be weak and likely to increase demand, thus increasing demand amid supply shortage can push copper price to reach record high, even above $11,000 in this year. In the short term there might be adverse reaction to the monetary tightening and MENA crisis but for the long term positive prices movement is expected.

Technically, LME 3 month copper price has strong support at $8700/t and $8000/t with resistance lies at $10200/t. For the short term, prices are expected to trade within the range of $8500/t and $10,000/t. For the next 2-3 months MCX copper price is expected to trade between Rs.380/kg to Rs.470/kg with buying on dips would be beneficial.

Understanding LME stocks and Cancelled warrants

A warehouse stock is the barometer to determine the price of particular commodity, there is an inverse relationship between stocks and prices as movement in stocks determine the price direction, a sharp decline in stocks indicates the demand is improving with less supply, however this relationship works better for long term perspective.

Taking example of base metals, on every working day London Metal Exchange warehouse releases stocks data of every base metal at 1.30pm/2.30pm IST which represents the total amount of stocks laid at LME warehouse. If stocks of copper are up by 2500 tonnes it means, that amount of stocks added to the existing stock of 380,525 tonnes. So there could be momentum selling but it is not necessary that surplus of stocks pressurize prices on intraday basis but it works better for long term perspective.

Cancelled warrants information is also important as it represents the change in stockpiles of metal which may no longer be available at warehouses and is booked for removal or onward shipment. This information is a valuable indicator of consumption trends which in turn can provide a valuable indication of possible future price action.

A sudden rise in LME cancelled warrants-the number of warrants on materials cancelled for delivery but not necessarily taken out of the exchange warehouses-indicates more stocks are expected to be taken out of warehouses. For e.g. if the cancelled warrants ratio for copper is up by 1 percent, then it means the outflow has reduced.

Opening stock

The opening stock is the closing stock from the previous day’s report.

Delivered in

The delivered in column shows the quantity of metal, for which LME warrants have been issued during the reporting period. Delivered in consists of metal that has arrived at the warehouse sometime previously, but that has not previously been on warrant.

Delivered out

The delivered out column is the amount of metal that has physically been removed from the warehouse company environment/location during the reporting period. A movement of metal corresponding to 50% of any warrant is considered a full delivery for reporting purposes.

Closing stock

The closing stock is simply the opening stock, plus the delivered in, minus the delivered out. In turn, today’s closing stock becomes the following days opening stock.

Open tonnage & cancelled tonnage

These two columns represent a sub division of the closing stock. The open tonnage represents warrants in free circulation, i.e tradeable, not cancelled.

The cancelled tonnage represents tonnage waiting for the owner’s instructions to the warehouse company for removal from the warehouse, or possibly re-issue of warrants. These warrants are no longer freely available for trading.

The metal referred to in open and cancelled tonnage remains within the warehouse environment. When a warrant is cancelled the open tonnage is reduced and the cancelled tonnage is increased. There is however no overall effect on the closing stock.

Where metal, the subject of a cancelled warrant, is returned to the market (see delivery in above) by creation of a new warrant, the only affect is on the make up of the closing stock. The impact of such an event is to reduce cancelled tonnage column and increase the open tonnage. There is no effect on the closing stock.

Combining the above two information we could relate that rise in warehouse inventory and fall in cancelled warrants ratio suggests negative trend for prices, while fall in inventory and rise in cancelled warrants ratio is supplementing for price rise. The other possible combinations left untouched could not be identified as any trend.

The above chart shows LME inventory of copper on monthly basis vis-à-vis prices. When inventories were at record near 549,000 tonnes in Feb 2010, prices were under pressure, but later on when inventory levels were getting down, prices started to increase. In the last year copper stocks on LME noted nearly 30% decline from 541000 tonnes to 376000 with prices gained by nearly 40% from $6700 to $9500 in the last year. 

Yearly Outlook Of Base metals

Commodities welcomed the New Year with positive node as last year 2010 remained eventful year for the global market with lots of events occurred with some were bearish while others have positive impacts but after it all bull players took command on the market, resulted year to finish with some optimisms. There were some skeptical as well as optimism talk on global economies, as demand from emerging nations like China and India spurred the sentiments, while quantitative easing US and stimulus packages to European countries helped western economies to come out from the recession. Now, US economy is on a recovery path, not strong but we can say slow, while European countries struggling to enter in recovery phase.

If we particular talk about base metals, then prices witnessed smart rally in the last year with the king of metal, copper, reached to all time high on expectations usage will outpace supplies next year as the global economy extends a recovery. LME copper prices recovered from $7400 level to $9500, settled near all time high with nearly 28% gain, while consistent declining stocks of copper added positive cues, LME stocks plunged by more than 30 percent in last year. Stainless steel material, nickel remained the top performer commodity in metal complex, rising by more than 30 percent from the previous levels, managed to settle above $24000 mark with stocks noted downside of more than 15 percent in last year.

In other metals, zinc and lead showed roller coaster ride with battery material, lead managed to settled with marginal gain of 5%, and zinc, metal used to galvanized steel, only was the worst performer in metal complex, noted nearly 5% downside on continues rising stocks. Continues build up in stocks put pressure on the prices, inventory of both metals noted more than 30% surplus in LME warehouses. Aluminium prices also remained positive with prices settled with nearly 10 percent rise amid stocks down by more than 8 percent.

Now the question arises, is the bull party over? Or will base metals plunge in next year? We can answer the question looking to fundamentals of metals and pointing out global economies. Performance of Chinese economy would be the best indicator to determine the prices, as Chinese economy growing at a 10% and that is driving China’s demand for base metals. Urbanization is the key factor to watch the demand as urban fixed asset investment rose by 24.9% during the first 11 month on 2010 with retail sales also reporting significant rise. The only concern is the Chinese inflation which hovers above 5% to multi month highs and to curb this Chinese government raised reserve requirement and interest rates many times. So, performance also depends on how the China will control this situation? In Asia, Indian economy growing fast, contributing much in global economy. Apart from the emerging economies, demand from western economies like US and Europe also expected to emerge which will be positive for base metals prices. 

It has been an eventful year for the price of nickel as the metal witnessed a rise in price early in the year when the price of nickel reached about US$27,500/mt. However after June, the metal has seen decline in its price, but managed to recovered and settled with more than 30 percent gain at $24000, taking a place of top gainer on metal complex. Last month remained skeptical for nickel with prices showed some volatile movement and closed with nearly 5 percent gain despite of 3 percent rise in inventories. In the last month, ETF Securities introduced the first copper, nickel and tin exchange-traded-products on LME and the emergence of these ETFs is expected to help raise prices.

In the conclusion, 2011 would be positive for base metals particular copper looks strong, may reach $11000 in the coming year. While nickel, lead and zinc also see positive movements. In the coming month, we expected copper to touch $10000 level on strong buying, while lead prices also see some firmness. Direction of zinc prices will depend on the inventory level as stocks are constantly rising. Our forecasts for nickel prices would be near $30000 in the next year, while lead prices would be around $3000 with zinc prices are expected to be around $2800 in the next year. For the month, correction is may take place in base metals prices, buying at lower would be profitable strategy for long term.

COPPER

Red metal posted golden performance in the last month settled at all time high near $9500 level, gaining by nearly 14% on expectations usage will outpace supplies next year as the global economy expected to recover. On MCX, copper prices reached to 440 levels on strong buying. Inventories noted sharp decline in last year however in the last month stocks rose by more than 5 percent.

If we look at the fundamentals then the situation is very simple as the combination of lower copper-exchange inventories, robust demand largely driven by emerging-market, urbanization and a constrained copper-supply outlook will sustain copper deficits large enough to the next year. The International Copper Study Group said that the global market for refined copper is expected to swing into a 435,000 tonnes deficit for 2011 as increased economic activity boosts demand to outstrip growth of refined production.


During the first nine months of 2010, world apparent usage grew by 8%, approximately 1.09 million metric tonnes compared with that in the same period of 2009.Chinese apparent usage increased by a more modest 4.5% from the very strong 2009 apparent usage level. World mine production in the first three quarters of 2010 continued to underperform, growing by a modest 0.8% around 100,000 tons when compared to production in the same period of 2009.

One Month expected trading range for LME Copper would be $9900/t-$9000/t.

NICKEL

In the second half of the year nickel prices remained fragile as many miners have announced plans to restart mines that were idled during the recession period. There is a flood of new supply exceeding demand resulted surplus in exchange warehouses stocks. The ramp up of Canadian nickel output following the end of the strike at Vale’s Sudbury Operation in Canada in July 2010 appears to be the swing factor. If we look at the LME stocks, then during the first half stocks noted sharp decline of 26%, down from nearly 160000 tonnes to 118000 tonnes, but after starting production stocks have been rising in the second half and stood near 135000 tonnes, surplus by 13% during July to Dec 2010.

According to the World Bureau of Metal Statistics, the global nickel supply was in 6,800 tons of shortage in the first ten months of 2010, compared to 600 tons in same period of 2009.The global output of nickel from January to October was 1.19 million tons, up by 4.5% year on year. Besides, the global nickel consumption has increased 142 thousand tons in 2010. Production of smelting nickel in October was 133.4 thousand tons and the consumption was 124.1 thousand tons.

Next Month expected trading range for LME Nickel would be $25000/t-$23000/t.

 
  ZINC & LEAD

LME zinc stocks remain in the focus with inventory increased by ten percent in the last month showing no sign of improvement. Increased supply in the markets and slow recovery in demand resulted rise in stocks with stocks level on LME risen by 30% this year and in Shanghai inventories increased by 80% since the beginning of the year, that’s why this commodity turned out to be a major looser in metal complex, reporting nearly 5 loss on yearly basis. However in the last month, prices witnessed strong buying and it reached to $2400 level on LME, gaining by more than 14 percent.

Zinc production have increased as mines which were idled due to recession have started production too fast on recovering demand, however demand is also there, in 2010 demand have strongly recovered but supply grew from a much higher base resulted surplus of stocks. In the first 11 months, China zinc supply grew nearly 21% to a record 4.8mt. Zinc concentrate production has risen by 25% to a record 3.5mt. Chinese net imports of refined zinc over the period of Jan-Oct 2010 declined by more than 60% amounted to 229kt compared to 617kt same period in 2009.

According to International zinc and lead study group, over the first ten months of 2010, global zinc market noted surplus of 2,11,000 tonnes as supply exceeded demand, while inventory levels increased by 2,31,000. World zinc mine production increased by 9.9% with refined zinc metal production as output in China, Belgium, Brazil, India, Japan and Russia resulted an overall rise of 15.2% in global production. With production, overall global zinc demand rose by 17% as significant recovery of demand in Europe, Japan, Korea and strong growth in Chinese apparent usage was the main factor.

Next Month expected trading range for LME Zinc would be $2600/t-$2250/t

Another price positive development seen in lead prices with LME prices reached to $2500 level, gaining by 15 percent despite of rising inventories. Positive has seen due to unusually cold weather across most parts of Europe in November and December; this has resulted a 40% year on year rise in lead-acid battery sales in UK in last month. However, continues build up in stocks capping some upside with LME les stocks rise towards ten year high of 208,650 tonnes reached in May 2000. Currently stocks stood near 207000 tonnes, which rose by 30% in 2010 and nearly 2 percent in month of Dec. Further, reduction of 20 percent power supplies to lead and aluminium smelters to China’s top aluminium and lead producing province, Henan supported the short term rally.

According to ILZSG, global lead market was in a surplus by 51000 tonnes in the first 10 months of 2010 and stocks increased by 54000 tonnes. Due to higher production in China, India and Mexico world lead mine output noted a rise of 7.7% ignoring slowdown in Peru and US. Global refined metal production increased by 5% due to increases production in Brazil, Canada, China, Germany and Japan. Further growth in Chinese apparent usage and a recovery in European demand were principal influences on an increase in global demand for refined lead metal of 5.3%. Chinese net imports of refined lead metal in the first ten months of the year stood at 12kt against 150kt over the same period of 2009.

Next Month expected trading range for LME Lead would be $2650/t-$2400/t.

In the conclusion, 2011 would be positive for base metals particular copper looks strong, may reach $11000 in the coming year. While nickel, lead and zinc also see positive movements. In the coming month, we expected copper to touch $10000 level on strong buying, while lead prices also see some firmness. Direction of zinc prices will depend on the inventory level as stocks are constantly rising. Our forecasts for nickel prices would be near $30000 in the next year, while lead prices would be around $3000 with zinc prices are expected to be around $2800 in the next year. For the month, correction is may take place in base metals prices, buying at lower would be profitable strategy for long term.

Base metals monthly outlook :

The September month remained positive for base metal complex with all metals traded near multi month high on rising euro against dollar coupled with improving macroeconomic fundamentals. Red metal the king of metals soared to 2 year high, crossing major mark of $8000 with dwindling stocks at major warehouse supported rally. Along with copper, other metals nickel, zinc and lead also took cues from macro economic outlook. Battery material lead gained by more than 10 percent while zinc prices settled with almost 8 percent gain with no major movements in stocks. LME Zinc prices sustained above $2200, and lead above $2300. While nickel remained the top performer, hovered near $24000 with 3 percent rise in LME stocks. Last month, rally in euro against US dollar was major supportive factor for base metals as from the chart we can see the rally occurred in euro and metals. Euro on monthly basis noted more than 7 percent rise while LME metal index gained by almost 10 percent.

Major economic numbers from US, Europe and China painted fairly good picture with China’s PMI numbers boosted sentiments during month end. The Purchasing Managers Index of China's manufacturing sector rose to 53.8 per cent in September, up 2.1 percentage points from August. Euro zone manufacturing index also witnessed positive sign. While, US economy grew only slightly in the second quarter, confirming that the pace of the economic recovery had slowed.Gross domestic product rose at an annual rate of 1.7 per cent in the quarter against expectations of 1.6 percent, marking a sharp decline from the first quarter, when growth hit 3.7 per cent.

COPPER

Red metal, posted golden performance in last month with prices climbed to 26 month high, broke $8000 mark and settled with nearly 10 percent monthly gain with macroeconomic and fundamentals factors remained fairly positive for copper. In the third quarter, copper prices increased by more than 20 percent with dwindling stocks at major warehouses, LME stocks down almost 30 percent this year, supported trend. Major economic numbers from US, Europe and China painted fairly good picture with US GDP and China’s PMI numbers boosted sentiments during month end. Weakening dollar against major currencies added positive cues as dollar index noted nearly 5 percent downside. Shortage of supply from major mines will be the major cues in the coming quarter as demand from emerging countries and western countries are expected to improve.

If we look at the supply side, then structural story in copper is not demand but its supply, which adversely affected due to some factors. International Copper Study Group, reported copper market in to deficit of 2,81,000 tonnes in first half of 2010.

Consistent declines in warehouse inventories indicate improvement in physical demand as stocks are down by 30% from a 6 year high, seen in Feb-2010. Currently stocks are below 4,00,000 levels.

• The rate of production is declining at the world’s largest copper mine. As Escondida, BHP Billiton forecasts 5-10% cut this year due to lower ore grades. Rio Tinto and Free port McMoRan mines also showing output cut in first half of the year.

• Further, there is a potential for drop in production from Australia as a resulted of resources tax, the government might implement.

• In last year, US copper mine production had been expected to increase by more than 2,00,000 tonnes but production declined by 1,20,000 tonnes due to slowdown.

So, when we consider recent lack of exploration spending, increasing demand from developing countries, declining resources-ore grades, insufficient number of new fund deposits, labour problems like strike all are together resulting shortage in supply.

The fourth quarter is shaping to be more positive as the recovery is on the track. In other words the fear of double dip recession has gone away as micro and macro -economic figures from different countries including industrial number, manufacturing growth rate, etc, are coming with positive bias.

Emerging Nations demand for copper: Looking to macro factors, electricity generation figures also indicates economic growth as electricity consumption is highly correlated to manufacturing and industrial demand. Electricity production grew at an average annual rate of 14.3% from 2004-07 and at the same time China economy grew at 10.5% year. However in 2008 and mid 2009, electricity growth has decreased due to slowdown in economic growth but at the end of 2009 growth rate hit all time high. And during first 9 months of 2010, growth rate looks at higher levels. So, overall data signals growth in China. The electricity growth rate is expected to reach 15% in 2010 that would be consistent with 10% GDP rate.

According to International Energy Agency (IEA), India’s power production needs to rise by 15-20% annually. Because of investment into new infrastructure India’s annual copper demand is expected to more than double to near 1.5 million tonnes by 2012 up from current level of 6 lack tonnes.

According to Reuters calculations based on net imports, domestic production and stocks monitored by the Shanghai Futures Exchange, China, the world's top copper, aluminium and zinc consumer, apparently consumed 662,179 tonnes of refined copper in August up 22% from a year earlier and 3.3% from July. The latest Chinese copper import figures were strong with net refined copper imports climbing 19.6% m o m in August following a 6.1% m o m increase in July. Scrap imports were also 5.2% higher in August the third monthly increase in a row.

So, increasing demand of red metal in developing nations will be more than make up for decreased demand in Western world. And when western economies recover, they must, and then the supply squeeze will become even tighter.

One Month expected trading range for LME Copper would be $8600/t-$7400/t.

LEAD & ZINC

Battery material, Lead, the second worst performer LME after zinc has recovered strongly in the month of September, posted almost 10 percent gain with expecting good demand from battery sector. During the third quarter drawdown in warehouse stocks failed to boost sentiments but prospects of new capacity additions in China and rise in cancelled warrants stocks on LME indicating the prospects demand of lead in the coming quarter. In third quarter prices have recovered from lows of $1581/t and broke above $2300 in September.

With new capacity kicked in and existing operation ramped up in anticipation of peak up in demand in fourth quarter, Chinese refined lead production in August increased by 10.7% from a year ago to 4,00,400 tonnes, which increased 5 percent on mom basis. Keeping this matter into mind, total production this year is expected to exceed 4 million tonnes.

While on demand side, car sales, major consumption sector of lead, have been improving worldwide with Chinese car sales have been strengthening as in August car sales in china were 15.6m units on an annualized basis, which boosted its forecast for sales this year by 1m to a total of 16m units. So, the expecting growth sector in lead demand will be sufficient to soak up the expansion in Chinese lead production capacity. China’s exports of lead have been exceeded by their import which implies that domestic Chinese demand is very strong.

International Lead and Zinc Study group reported lead market in surplus by 52,000 tonnes in first seven months of the year where global refined lead use was 5.055 million tonnes compared with 4.894 million in same period last year. World refined lead output was 5.107 million tonnes, up from 4.976 million a year earlier.

Prices of Zinc have risen along with other metals despite of poor fundamentals as macroeconomic drivers remained somewhat positive with prices reached the healthy level of $2,200/t in last month, posted nearly 8 percent gain.

Looking to demand-supply statistics, china’s import zinc concentrate noted decline of 16% as China imported 1.7Mt of zinc concentrate in the first seven months of 2010 while sharp rise in production is noted with china produced 2.44 Mt in the first eight month of 2010 which is up 35% on same period last year. China’s imports of refined zinc in the first seven months to July were 0.177 Mt, down 67% on the year while refined production was 3.33 Mt in the year to August, up 24% year-on-year.

It is clear that in 2010, zinc market would be in a surplus however in 2011 and 2012 zinc concentrate market is expected to tighten as many major mines are near depletion or closure resulting not enough supply and this would affect refined supply, especially in China where power costs have risen and margins have already been squeezed, so sustained low treatment charges may force some smelter closures. Currently, China is relying more on domestic zinc mine supply to fuel its refined output, but to fulfill the additional smelter capacity due online in the next two years it will need to increase its imports of zinc concentrate.

The latest report released by International Lead and Zinc Study Group indicates that the global market for refined zinc metal was in surplus by 151000 tonnes in the first seven months of 2010. Over the same period stock levels reported by the LME, SHFE and producers and consumers increased by 194kt.

Global zinc mine output rose by 13.6%. This was primarily driven by increases in Australia, China, India, Mexico and Namibia. An increase in global refined zinc production of 16.2% was a consequence of higher output in a number of countries, most notably Belgium, Canada, China, India and the United States. Global demand for refined zinc metal rose by a significant 18.7%, largely driven by increases in China (12.9%) and rebounds in Europe (31.9%), Japan (31.8%).

Next Month expected trading range for LME Zinc would be $2350/t-$2075/t and Next Month expected trading range for LME Lead would be $2500/t-$2150/t.

NICKEL

Despite lower steel demand in third quarter and rising inventories nickel prices managed to trade with positive bias and posted more than 12 percent gain as prices have been largely macro driven with China’s strength more than offsetting concerns of US and Europe economic sluggishness. Three month nickel prices on LME increased by more than 12% with prices just near to $24000 level, while nickels stocks have rose by almost 3 percent.

According to leading analyst, the global nickel market will be deficit of about 85,000 tonnes this year and will return to a demand/supply balance from next year due to new capacity coming on stream. Miners around the world have started ramping up output of nickel, a main component in stainless steel, after cutting back during the depths of the global financial crisis. Lagging the rise in demand from stainless producers in Asia, nickel producers have been playing catch up bringing shelved mine and treatment facilities on stream delayed by the financial crisis.

Vale SA expects to return to full production at its nickel mine in Sudbury, Ontario, following a prolonged strike this year and last. The Brazilian miner also aims to start production at a mine in New Caledonia by the end of this year, while First Quantum Minerals Ltd. says it has started hiring for a mine in Australia. Together, those two mines could add close to 100,000 metric tons to global production, equal to roughly 7% of expected 2010 demand.

On demand side, focus should be more on emerging economies rather than western economies demand from Asian countries are improving amid short term supply squeeze will be major factors to determine prices. Demand has roared back this year, helping draw down nickel stockpiles at the London Metal Exchange by more than 25% since February.

With improving demand from those nations and expecting recession to end, major mines returned to full production. So, it is uncertain that nickel supply will grow much in the short term and also uncertain about demand outlook as it is not guaranteed that demand from the stainless steel sector will rebound in fourth quarter. Overall, demand barometer, LME inventories might be the best indicator for underlying fundamentals and currently they are neither bullish nor bearish. So, until a sustained movement in these stocks is seen we expect to nickel prices to follow the broader macro trend rather than fundamentals.

Next Month expected trading range for LME Nickel would be $22500/t-$25000/t.

With rising prices of base metals, somewhat correction might take place but it would be buying opportunity for long term as improving macroeconomic fundamentals coupled with supply crunch will be price determinant for base metals. Overall, particular copper looks good, while price movements of nickel depends upon stocks, meanwhile prices are expected to trade with positive bias. Technically and macro driven rally supported lead and zinc prices to trade higher. In the next month prices are expected to maintain their earlier gains.

BASE METALS ON A HIGH

Base metals have recovered from the depressed levels of early June with prices trending higher in July taking macroeconomic cues coupled with rebounding euro, steady growth in global equities, declining inventories, arbitrage opportunity and positive economic numbers gave the rally some fresh momentum. The impact of escalating sovereign debt crisis in Europe and uncertainty over China's efforts to curb excessive credit creation which were the main concerns of the first quarter of 2010 has eased. Increase of world GDP forecasts by IMF to 4.6% in 2010, and promising future for China and India in terms of GDP engulfed metals to maintain firm. The International Monetary Fund lifted China's GDP growth forecast for 2010 to 10.5 percent from the earlier projection of 10 percent which spurred the sentiments.

The Reuters-Jefferies CRB index, which acts as a global benchmark for commodities, hit a 12-week high on the broad-based rally, matching the euro's peak against the dollar. The euro rallied after a reading for the euro zone economic sentiment reached a 28-month high as the euro jumped to 11-week highs against the dollar. The LMEX Index of six industrial metals has gained 21 percent in the past year. Over the few weeks, a run of mixed US data has highlighted the patchy nature of the economic recovery. Copper, aluminium, lead and zinc all bounded to fresh highs since May, while daily warehouse inventory also reported downside.

The metal used in power and construction, rose to a 12 week high in London to $7300, gained more than 12%, and remained outperformer in metals. Stainless steel ingredient nickel, also posted 12% gain, settled above $21,000 on declining inventories. Galvanizing metal zinc and battery material lead prices settled with more than 13% gain with. Lead remained the top performer on LME; prices rose to 11 month high, gained nearly 20% and settled above $2000 against previous level of $1750.

The recovery in demand in western economies has to be viewed in the context of the exceptionally weak post Lehman environment, but nevertheless a sharper than expected rebound has been experienced in many countries. This reflects three main factors–fiscal and monetary stimuli, strong growth in developing countries and increased capital spending in mature economies by a strengthening corporate sector, which has in turn encouraged restocking.

In 2010, the developing country growth story has broadened to the other BRICs and countries such as Indonesia and Turkey. The global automobile sector illustrates this situation very clearly. Despite lackluster growth in developed countries, global car production rose to new historic highs thanks to the exceptionally rapid growth in demand from consumers in developing countries. China is not the only expanding market. Russian, Indian and Indonesian sales in June were up 47%, 22%, and 78% respectively, year-on-year.

COPPER

Macroeconomic uncertainties are forming a natural cap and floor to prices, although the floor has been getting lower. Copper rose to a 12 week high in London to $7300 as remarks from China's central bank fueled optimism about the outlook for demand in the world's largest consumer of the metal. People bank of China said, China has good economic fundamentals, lifted China’s equities to a two month high.

 Copper prices in both New York and London have gained 12 percent through July, focusing on demand both real and anticipated from top metals buyer China and selective U.S. data that signal traction in economic recovery. Technically buying lifted copper to visit highest peak during the month and put the strong support at $5800 on LME and Rs.280 on MCX. On chart, LME copper prices have formed Inverse Head & Shoulder pattern and the level has broken at $6800, which may target $7600-$7800 in two months. And on MCX target would be around Rs.355/kg.

 

 

Falling SHFE and LME copper stocks have provided a positive support to the copper price. Both exchanges have seen copper inventory outflows, with SHFE stocks falling from a high of 189,441t in early May to 104,507t and those in the LME from a high of 555,075t in early March to 415,552t in July. Stockpiles have fallen to 415,525 tons, the lowest level since Nov. 18. They’re down 17 percent this year and headed for the first annual drop since 2004 and stocks have dropped about 24 percent from levels in mid February, suggesting firm demand. Bookings to remove copper from LME warehouses have gained nearly 15 percent, the most since June 14, to 38,550 tons, the highest level since June 2, 2009.On fundamental side, consumption of copper exceeding on improving demand from emerging economies as International Copper Study Group reported, world refined copper consumption exceeded production by 67,000 tonnes between January and April this year, against a surplus of 74,000 tonnes in the same year ago.

One Month expected trading range for LME Copper would be $7800/t-$6800/t.

LEAD & ZINC

Lead, the battery material perceived smart improvement in July month as prices recovered from one year low of $1540/ton. LME three month lead price has outperformed all base metals, rising nearly 19% in July month. On fundamental side, supply side dynamics are becoming increasingly supportive for lead prices as smelter closures due to drought as well as environmental concerns continue to be factors in lead production. U.S. lead demand is much strong than European lead demand because it is far more leveraged to the U.S. auto sector, which has performed strongly. Meanwhile, replacement battery demand accounts for the majority of battery demand in North America.

Reversal in LME stocks builds and expectations of lead-acid battery demand remained positive factors as LME warehouse stocks has provided the greatest support to the price, falling for the first time since early 2009. Stocks last stood at 181,450t in July, down from 193,000 in mid-June. In July, stocks are down nearly 5% on LME.

Chinese imports of lead suggest that the market may push for higher prices. China has been a net exporter of lead in each month from November 2009 to April 2010. This changed in May after it imported 3,144t of refined lead and exported just 1,335t. Chinese car sales have soared and replacement battery demand is likely to rise significantly as China enjoys an unusually hot summer.

LME Zinc prices witnessed smart gain and settled with 14% gain at $2025 against previous level of $1800. In last month prices recovered by more than 13% as prices having fallen near 28% from the start of the year due to euro zone debt crisis.

Decline in Chinese Zinc stockpiles and on warrants data has helped Zinc prices to climb up. LME and SHFE stock flows lend the impression that the glut is easing but only very slowly. Stocks on LME have rose to nearly half percent on lackluster demand. LME stock builds have all but dried up since mid-May, having remained at 620,000 in July. SHFE zinc stocks paint a slightly rosier picture, having fallen from their high of 295,454 in late May to 242,932t in July, but even so they are 47% up from the start of the year. Furthermore the slight slowdown in Chinese demand expected for the remainder of this year, as Beijing reins in its economy, will hit zinc demand due to its large end use in galvanised steel used in construction.

Next Month expected trading range for LME Zinc would be $2180/t-$1900/t and Next Month expected trading range for LME Lead would be $2200/t-$1950/t.

 

NICKEL

The nickel price enjoyed resurgence earlier this year, hitting a high of $27,590/t in mid-April. Since then the price has been trending lower to $19,000/t levels in early July. However during month end prices witnessed smart buying and closed above $21000, with 12% gain.

Nickel prices continued to drift lower through June and this month, weighed by a combination of macroeconomic uncertainties and expectations of a slowing global stainless steel sector in the third quarter. The seasonably slower summer period in the U.S. and Europe contributed to a decline in nickel demand.

Declining LME nickel stocks have lent support to the thesis that nickel demand from the stainless steel sector has strengthened. This certainly seems to hold true for late Q1 and Q2 2010, with LME nickel stocks sliding from a high of 166,476t in early February to 117,498t in July. Stocks are down 5% in last month.

The extent to which the full restart of supply from Vale’s Canadian operations will tip the balance later on this year will depend on the level of demand. The recent tentative settlement between Vale and the year-long striking workers at its Sudbury nickel operations in Canada looks likely to widen the global nickel surplus.

According to estimates of World Bureau of Metal Statistics, nickel was in marginal deficit during first 5 months of 2010. The markets of refined nickel were in deficit of 5000 tonnes in January to May 2010 period as against a market surplus of 48600 tonnes in January to May 2009 period. WBMS said that the inventories for the first 5 months of 2010 were down by 20000 tonnes when compared to last year. Refined production in January to December 2009 totaled 132,670 tonnes and demand was 130,500 tonnes. Mine production increased by 5.7% to 54,600 tonnes. Apparent world demand was 90000 tonnes higher from 2009.

Next Month expected trading range for LME Nickel would be $22500/t-$20000/t.