Since the US and China have locked horns in a tariff war, base metals have been at the receiving end. But it witnessed some bounce last week as the market started anticipating trade war fears to dissipate.
Since June, considerable weakness has been visible in the base metal counter. Tariff war between the US and China is a greater worry for the Asian industrial giant as it has a trade surplus with the former. The trade war comments and developments have been favouring the US dollar, which is strengthening against a large number of currencies, including yuan.
Depreciation of yuan and the anticipation of lower demand in the event of a trade war have been affecting base metal prices. More than the supply disruption of commodities, the market has also been concerned about global growth. Shrinkage in global growth will affect the demand for all products, including commodities.
“In the recent past, whenever the US administration makes a remark on imposing tariffs on Chinese products, we have seen strengthening of the dollar and sell-off of base metals. But when China comes out with a tit-for-tat retaliation, prices see some rebounding,” said Jateen Trivedi, technical research analyst at Bonanza Portfolio.
In the beginning of last week, US president Donald Trump announced imposition of 10 per cent tariffs on about $200 billion worth of Chinese imports and warned that it will immediately pursue tariffs on approximately $267 billion of additional shipments if China retaliates.
Collection of tariffs on the list of products will start from September 24 but the rate will increase to 25 per cent only by the end of 2018 in order to enable US companies to alternate their supply from other countries. So far, the country has imposed tariffs on $50 billion worth of Chinese products to pressure Beijing to make sweeping changes to its trade, technology transfer and high-tech industrial subsidy policies.
Most base metals, including copper, zinc and nickel tanked after Trump’s Monday announcement. China hit back saying it will institute new tariffs on US goods worth $60 billion on September 24. The tariff rate on the list of products will range between 5 per cent and 10 per cent. Copper in the London Metal Exchange bounced back from $5,800 per tonne to $6,200 per tonne by the end of the week. Similarly, Nickel touched $13,075 per tonne. In September, Nickel had seen a low of $12,000 per tonne.
Zinc sharply recovered from the weekly low of $2,292 per tonne to $2,460 per tonne. But aluminum and lead have remained unaffected by the trade war fears. Lead was trading flat last week. Since mid-August, the metal has been trading in a range of $1,952- 2,150 per tonne. The fundamentals of the metal have been largely influencing the prices.
“The Chinese government, in its crackdown against polluting industries, has been heavily coming down on lead units. But in recent times there has been not much development on that front and many of the units are back in operation. This has increased availability of the metal and hence prices have been rather flat,” said Trivedi.
In case of aluminum, the inventory levels in the LME warehouses influenced the prices.
The market views the staggered imposition of tariffs by the US as signs of reconciliation between the two large economies. Trump has also exempted Apple products from the tariffs, though he had earlier asked the company to move back manufacturing to the US. This too is considered a positive move.
“If both the countries sit across the table and arrive at a solution, base metals will see considerable upside in the coming weeks. Copper, zinc and nickel could move up between 7 per cent and 10 per cent and lead and aluminum by 3-4 per cent,” added Trivedi.