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.