Base Metals Update – December 2012

Base metals ended the month of November with impressive gains; as China’s economy has showed strong signs of recovery. In this regard, flow of Chinese macroeconomic numbers has been on the positive side. This can be explained by the fact that the country’s industrial output, electricity production, retail sales, residential sales, fixed asset investment and consumer prices during November have been reported higher on yoy basis. In spite of the looming US fiscal cliff, the non-ferrous complex has exhibited impressive resilience.

The vagaries regarding the fiscal cliff negotiations have not adversely impacted the non-ferrous complex, as compared with the apprehensions the market participants were initially dwelling with. This also explains that there has been a change of sentiment, wherein the investors are strongly anticipating a successful resolution to the US budget cliff. Base metals have been largely resistant to the fiscal cliff drama and have been moving higher, reacting to improving sentiment regarding Chinese economic growth prospects.  Bulls also have also found cushion from reports that China is expected to soon resume stockpiling of base metals. In addition, its is widely anticipated that newly elected Chinese political regime will announce a further series of stimulus measures, including a likely lowering of reserve requirements and interest rates.

On US macroeconomic front, the country’s GDP expanded by 2.8% during Q3, as decent growth was witnessed in labour markets, construction activity and housing industry. The truth that housing markets have entered a resurgence mode can prove highly encouraging for the bulls, considering that this sector is a vital contributor to the US economy.  Although US manufacturing activity contracted in November, we would not like to read too much in to this decline, as weakness in not evident in US manufacturing sector, as the automobile industry (major component of US manufacturing) is registering robust growth in sales.

We expect base metal prices to trade firm in the coming weeks, as the odds favour a successful agreement on US fiscal cliff. However, if the US legislators remain mired in a deadlock over the fiscal cliff, we could witness a substantial setback in the complex. Although, we remain optimistic on the non-ferrous metals, as there are early indications of Chinese and US economy bottoming out and may resume with the upward trajectory. In addition, the fact that housing industry in US is showing signs of revival could also provide courage to the bulls, which indicates a near term upside in metal prices.