Base Metals Monthly: Economy ripple, Metals cripple - August 2012

Of late, upside in base metals has been suppressed, thanks to the worsening debt scenario in Europe.

January 01, 1970 5:30 IST | India Infoline News Service

Base metals had yet another dull performance during July, with most of the metals down on YTD’12 basis. LME Nickel continues to remain as a laggard amongst the non-ferrous metals complex, losing about 17% on YTD basis. LME Lead and LME Aluminium are down by 7% & 8% respectively. LME Copper is down by 2%, while LME Zinc prices are largely unchanged on YTD’12 basis. On demand front, Chinese economic activity is struggling and monetary easing policies is not been able abate the slowdown in the world’s largest metal consuming nation. In this regard, China’s second quarter GDP has been reported at 7.6%, while June industrial production growth has slowed down to 9.5%.

During the midst of July, base metals somehow garnered some support from the wide speculation that Chinese government is poised to initiate further monetary stimulus. However, we remained skeptical regarding the knee-jerk reaction in base metal prices to the growing expectations of further monetary easing by China. It reminded us of the cliché, wherein one puts the cart ahead of the horses rather than putting horses ahead of the cart. Monetary easing on a standalone basis cannot stimulate economic growth in China, as the country’s biggest export partner (Europe) is mired in a recession. Exports constitute a major component of Chinese economic growth.

In addition, receding economic activity on the both sides of the Atlantic corroborates concerns regarding the demand prospects for the industrial metals. In this regard, Spanish economy has officially entered in to recession, with the nation’s GDP contracting for consecutive two quarters. U.K second-quarter gross domestic product has contracted by 0.7%, the most since 2009. In U.S, economic growth slowed in the second quarter as consumers spent at their slowest pace in a year. The nation’s GDP growth for the second quarter slowed to 1.5%, as compared with the growth number of 2% during the prior month. In addition, U.S Federal Reserve Chairman Bernanke offered a gloomy view of the economy's prospects, but provided few clues on the fresh round of monetary easing measures. Bernanke stated that the pace of the US economic recovery has been unstable, adding that growth is slowing, largely impacted by the European crisis and the prospect of fiscal tightening in the US.

Of late, upside in base metals has been suppressed, thanks to the worsening debt scenario in Europe. In addition, slowing economic indicators in U.S and China has enacted as a double whammy for the non-ferrous metal bulls. Inability of copper prices breaching the key resistance levels of US$7,800 during the past few weeks had amplified the probability of LME copper prices drifting below US$7,000/ton. On the domestic front, MCX copper prices have breached the significant support levels of 415.5/kg, which translates in to a strong probability of prices testing the lows of Rs408/kg.

Base Metals Snapshot
  Jul-12 Jun-12 mom (%) Jul-11 yoy (%) YTD (%) Avg'12 Avg'11
*Price 3M(US$/ton)                
LME Copper 7,560 7,685 (2) 9,830 (23) (2) 7,995 8,826
LME Aluminium 1,889 1,911 (1) 2,624 (28) (8) 2,084 2,421
LME Lead 1,920 1,861 3 2,613 (27) (7) 2,025 2,390
LME Zinc 1,842 1,877 (2) 2,490 (26) (0) 1,965 2,212
LME Nickel 15,865 16,730 (5) 24,995 (37) (17) 18,079 22,865
LME Index 3,191 3,252 (2) 4,330 (26) (5) 3,446 3,923
Source: Bloomberg, India Infoline Research   
* Prices as on 6
th August, 2012

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