June 6, 2011 BASE METALS - MONTHLY Base metal prices ended largely lower on the back of re-emergence of concerns from the Euro-zone, weak economic data and expectation of decline in demand. European debt concerns were back in lime-light as downgrades of countries like Greece continued. This sent the Euro lower and led to rebound in the dollar index thereby creating further pressure on base metal prices. Dollar index ended with gains of 2.07 percent, the first monthly gain since November. All the other major currencies like Euro and GBP remained under pressure. Japanese economy contracted by 0.9 percent in the first quarter of 2011 given the strong catastrophe witnessed in the last month of the quarter. The nation has slipped back into recession after marking second consecutive quarter of contraction in GDP and continues to remain in deflation. This prompted the Bank of Japan to leave interest rates unchanged. Credit Rating Agency, S&P, downgraded its outlook on Japan sovereign debt to negative from stable. This downgrade was largely owing to concerns about the fiscal deficit of the government, which might balloon owing to reconstruction costs. Federal Reserve of US left interest rate unchanged at 0.25 percent and would complete even the bond buying program of $600billion as per the schedule. The central bank however revised its economic growth forecasts lower while the inflation forecasts higher. Non-farm payrolls data for the month of April from US came in better than expectation as the economy added jobs at a faster pace than in the prior month. Unemployment rate however rose to 9 percent as against 8.8 percent, but this was largely owing to decline in the number of people applying for jobs.
Coming to World s largest consumer of metals, China, it raised bank s reserve ratio by 50 bps, thereby marking fifth consecutive hike this year. Consumer prices rose by 5.3 percent in the month of April, slightly higher than expectation of 5.2 percent. Growth is also moderating and thereby industrial production growth from the region declined in the month of April. After increasing rates in steps of 25 bps for eight times, Reserve Bank of India increased repo rate by 50 bps to 7.25 percent. The central bank sounded concerned about the inflationary situation and indicated that inflation might continue to remain higher in the first half of fiscal year 2011-12. India s industrial production numbers grew by a better than expected rate of 7.3 percent in the month of March. For the whole of fiscal year 2010-11 industrial production grew by 7.8 percent as against 10.5 percent in the previous fiscal. Capital goods provided support to growth as they grew by 12.9 percent after contracting three consecutive months. Inflation in the Euro zone rose to 2.8 percent as against target rate of close to two percent while UK s economy grew by 0.5 percent in the first quarter of 2011 as against contraction by similar percentage in the prior quarter. Fitch downgraded Greece to B plus from BB plus largely owing to scale of the challenges that the country has been facing. The country is already implementing lot of austerity measures that is creating further pressure on the economic growth. Other economic data in the form of ZEW survey numbers also came below expectation. Aluminium: Aluminium prices declined by 3.3 percent in the month of May on LME and nearly 3 percent on MCX. Higher stocks along with weak economic data added to the pressure. Total stocks on LME rose to near 4.7 million levels, highest level since 1978. As per Brazil Aluminium Association, Brazil s consumption of aluminium products could rise by 13 percent to 1.3 million tonnes. Consumption though has remained strong; production continues to outpace the demand. Chinese output of aluminium hit record in the month of April for the second consecutive month. Total output amounted to 1.459 million tonnes up by 2.2 percent from the previous record high of 1.428 million tonnes. Lot of capacities which were previously closed owing to power shortages came back on stream thereby raising output. Cancelled warrant ratio on LME has also moved higher thereby indicating that stocks might witness draw-downs in the near term. This might limit the downside for the metal price.
Copper: Copper prices declined by more than a percent on LME while ended flat in Indian markets. Lower imports by China along with increase in stocks added to pressure on prices. Stocks on London Metal Exchange continue to witness build-up, thereby taking the total stocks to 467,775 tonnes. Data from China indicated that the nations copper imports amounted to 262,676 tonnes in April. This is lower by 40 percent (YoY) and down 14 percent from March thereby weighing on prices. Domestic copper production also declined by 3.4 percent from March to 454,000 tonnes. Japan s exports of refined copper fell by 16 percent in March to 50,258 tonnes. This marks the sixth consecutive decline. Output in the nation also slid by 3.7 percent in March to 68,620 tonnes the biggest decline in 17 months. This is largely owing to disruption in production owing to devastating earthquake. Lead: Lead prices rose by more than a percent on both LME and MCX thereby reversing some of the previous month s losses. Stocks on London Metal Exchange rose by 4.5 percent to 322,000 tonnes. Automobile sales in US came in better than expected at 13.40 million thereby marking third consecutive month when the total sales remain above 13 million. Sales numbers from India however came in lower as consumers deter purchases owing to higher interest costs. In India, car sales increased by 13 percent in the month of April to 1.62 units. This is the slowest pace in nearly two years, but some of its owing to higher base of pervious year when sales grew by nearly 30 percent. Interest rates are also on an upward trajectory thereby hurting demand. Battery is the major user industry of the metal lead.
Nickel: Nickel prices underperformed the entire base metal pack and ended lower with double digit losses. On LME, nickel prices ended lower by 12.1 percent while weaker rupee limited the losses to 11.1 percent in the Indian markets, Expectation of balanced market as against deficit in 2010 added to the pressure on prices. Nickel however is the only one to witness continues draw-downs of stocks from LME. In the month of May stocks declined by 2.8 percent to 114,102 tonnes. Norilsk Nickel, the world s biggest producer of nickel, expects the market to come back into balance this year as against deficit in 2010. This created pressure on prices. The company expects consumption to rise by 5 percent while production to increase at an accelerated pace of 10 percent. This would bring the market into balance. Zinc: Zinc was the top performer among the base metal pack in the month of May as it ended with gains of nearly a percent on LME and 2.8 percent on MCX. Reports indicated that output might decline after devastating earthquake disrupted activities at many of the Japanese smelters. Overall, the market might remain in surplus this year, but given the disruption in output, it might narrow down. Xstrata s zinc production declined by 6 percent in the first quarter of 2011, this was largely owing to floods in Australia and power shortages. Other companies in Japan like Mitsui might also report decline in output. Stocks on LME however continued to witness build-up as they increased by 4 percent to 854,550 tonnes.
Concerns about the peripheral European nations especially Greece would continue to loom. On the one hand, European Union and IMF have shown discern over providing funds given the inability of the country to meet the terms set when 110 billion funds were provided in May 2010. Greece is facing public outrage given the austerity measures it is undertaking to cut spending and increase government revenues. China has been showing signs of slowing growth, which would be positive in the long run, but in the near term it might weigh on metal prices. Bond purchasing program, so called Quantitative Easing 2, in US is due to expire in June and recent weak economic data has raised talks of even QE-3, but that seems unlikely and thereby liquidation of speculative positions ahead of that might also be witnessed. On the supply side however concerns continue to remain. Reports indicated that operations at Codelco s El Teniente, one of the largest copper producers, in Chile have slowed down due to strike by subcontractors. This has raised concerns that output might decline which is already facing headwinds from lower ore grades and bad weather conditions and thereby might support metal prices. Technically also market is expected to find support and thereby we are recommending buying. RECOMMENDATIONS: COPPER - LME 3M Fwd: Buy at $9000-9020 TP $9400-9520 SL $8800 MCX (JUNE): Buy at 403-408 TP 422-428 SL 392 LEAD - LME 3M Fwd: Buy above $2545 TP $2740 SL $2380 MCX (JUNE): Buy at 107/108 TP 115 SL 103 ZINC - LME 3M Fwd: Buy above $2290 TP $2420 SL $2200 MCX (JUNE): Buy at 100/101 TP 107 SL 95 NICKEL - LME 3M Fwd: Buy at $22450 TP $24000 SL $21900 MCX (JUNE): Buy at 990/1003 target: 1060 then 1100 SL below 960 ALUMINIUM - LME 3M Fwd: Trading Range $2585 - $2740 MCX (JUNE): Trading Range 112-122
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