International metal prices have shot up in recent months on the back of a strong pick up in global manufacturing activity, a weaker dollar and production disruption leading to prices of steel, copper, alumina and zinc gaining by 25-35 per cent during the year.
The Goldman Sachs Commodity Index (GSCI), LME (London Metal Exchange) and GSCI Industrial Metals Index have appreciated by 28-35 per cent over the past one year.
According to analysts, the surge in metal prices is mainly driven by improved manufacturing activity globally since the second half of 2016. The global manufacturing Purchasing Managers’ Index (PMI) gained 0.1 point to 52.7 in July 2017 and the index stood over 52 levels for the tenth consecutive month.
Global commodity indices have gained substantially as the non-ferrous metal segment has seen a sharp appreciation in prices in the last few months, due to improvement in macroeconomic factors and rise in demand.
The prices of copper, aluminium and zinc were supported by stable demand, supply-related reforms and a weak dollar. Copper prices have sharply appreciated throughout the second quarter of CY2017 with prices moving up by 16 per cent year to date. Average copper prices for the first seven months of this year stood at $5,810 per tonne, an increase of 23 per cent year-on-year.
Jefferies recently said in a report, “We have been bullish on copper due to a combination of structural supply constraints and growing global demand. The electric vehicle revolution now also provides a major new source of additional secular demand growth. We expect a multiyear period of growing deficits in the copper market to lead to a higher copper price.”
Similarly, aluminium has rallied 24 per cent in a year on expectations of China capacity and production cuts. Aluminium capacity growth in China is likely to slow down to 2-3 per cent in 2017/8E while demand expectations stood at 6-8 per cent suggesting a rise in LME prices. The average LME aluminium prices for the first seven months of this year hovered around $1,890 per tonne. Zinc prices are expected to find support due to the global deficit and low inventories. It is expected that a global zinc market deficit of 226,000 tons for 2017.
Analysts expect metal prices to stay at elevated levels on account of a combination of factors like global growth outlook, trade growth and supply disruptions.
Base metals rally
Kaynat Chainwala, research analyst-base metals, Angel Commodities Broking said, “Aluminium is leading the base metals rally as strong industrial activity in China boosted demand prospects. Aluminium on the LME is trading at $2138/t, highest since February 2013 while it has surged to a nine-year high of Rs 136.45/kg, on the MCX. China’s Caixin manufacturing PMI rose to a six-month high in August, dismissing fears of a tighter credit and cooling property market induced slowdown.”
She added that the spill over from the upside in steel prices is reflecting in base metals. Steel prices hovered near the highest since 2013 after a statement from China’s environment ministry that the mainland nation plans to conduct 15 rounds of inspections during its new campaign to curb smog in the period starting September 1 and continue until the end of March 2018. As a result, Nickel prices surged to nine-month highs of $11985/t on the LME and Rs 765.6/kg on the MCX. Zinc and copper witnessed marginal upside, but continue to be near multiyear high levels, Chainwala noted.
Manufacturing activity in both the US and the Eurozone remained strong. Experts said the growth has been largely broad-based and reflected positive contributions from all components, especially the engine of growth, consumer spending, as well as private investment. Apart from that, the price surge is supported by a pick up in manufacturing activity in China which has been consistent since the beginning of this year.
The Chinese economy clocked 6.9 per cent growth in the second quarter of 2017 outpacing the government’s target of 6.5 per cent for 2017. A weaker dollar is also supporting the surge in metal prices as the GSCI and the Dollar Index are inversely proportionate. Experts said this relationship has largely played out in the recent past. From the November 2016 highs, the dollar has fallen by 10 per cent August 2017. Experts said the demand from the US, the European Union and China is likely to remain strong on account of capital investments and macro factors, while the downside risk appears to be ongoing geopolitical factors.