Base Metals Update – February 2013

Base Metals Update – February 2013

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

LME base metals have traded on a positive note during January, with strong buying interest witnessed particularly in Nickel and Lead. Persistent flow of positive macroeconomic data from China is providing lot of courage to the bulls. In this regard, China’s economy grew by 7.9% on yoy basis during the fourth quarter of 2012, much higher than the growth of 7.4% during the prior quarter. The country’s top think tank has also lifted its economic growth forecast for 2013 to 8.4% from 8.2%, with faster expansion seen in the first half of the year. In addition, rebound in Chinese manufacturing activity has provided a shot in the arm for the bulls.

However, recessionary conditions prevail in Europe, Japan and UK. In fact, many economies contracted during the last quarter of 2012, with US GDP surprisingly declining by 0.5%. Overall macroeconomic data out of the US has been better than expected, which has led to a general perception that the fourth quarter GDP contraction is just a blip on the radar and the growth numbers in this quarter should improve. There has been improvement in US consumer spending, housing and manufacturing PMI. Prominently, automobile sales have been reported at a five year high. In labour markets, there has been steady progress on job creation and upward revision has been made for the jobs generated during 2012. Even consumer confidence readings have improved during January.

Notwithstanding the contraction in European economies, the concerns over sovereign debt crisis have been mitigated to a larger extent. This can be explained by the calmness in the credit markets, wherein sovereign bond yields particularly in Spain and Italy have drastically declined. Effectively, euro has surged dramatically, now trading well above 1.35 against US dollar. However, resurgent euro has caused lot of woes for the region’s exporters, denting the region’s competitiveness as far as export of goods and services is concerned. This in fact can undermine the prospects of an imminent economic recovery. Considering this, we should not be astonished by European Central Bank announcing an interest rate cut in the near term.

In Japan, the government has decided to devalue the yen in order to promote the nation’s exports. In this respect, the central bank has doubled its inflation target to 2% and made an open-ended commitment to buy assets. This could lead in to expansion of trade and contribute to the global GDP growth.

Macroeconomic health in US seems to be improving, given the uptick witnessed in manufacturing, housing and employment markets. Resurgence is also evident in Chinese growth story, primarily supported by incremental government spending on infrastructure projects. Meanwhile, Japan may witness a pick up in exports, aided by aggressive devaluation of yen. Distress regarding European debt crisis has also dissipated. Considering such multitude of positive developments across the globe, we infer that base metals should have a higher trajectory in the short run. Even though we are optimistic on non-ferrous metals over the short-term, we do not see any sizable upside in prices, restricted by projections of a surplus this year.

Base Metals Snapshot
  Jan-13 Dec-12 mom (%) Jan-12 yoy (%) YTD (%) Avg'12 Avg'11
*Price 3M(US$/ton)                
LME Copper 8,165 7,931 3 8,320 (2) 4 7,953 8,826
LME Aluminium 2,091 2,073 1 2,238 (7) 2 2,052 2,421
LME Lead 2,431 2,330 4 2,213 10 5 2,074 2,390
LME Zinc 2,145 2,080 3 2,106 2 4 1,965 2,212
LME Nickel 18,325 17,060 7 20,855 (12) 9 17,591 22,865
LME Index 3,558 3,455 3 3,667 (3) 4 3,418 3,923
Source: Bloomberg, India Infoline Research  * Prices as on 6th February, 2013

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