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Last Updated : Jul 22, 2020 12:08 PM IST | Source: Moneycontrol.com

Base metal prices have outrun fundamentals, may witness correction: Kotak Securities

The recovery in prices have been fueled by hopes of revival in global economic health along with expectation of further stimulus measures both fiscal as well as monetary.

Moneycontrol Contributor

Ravindra Rao

Most base metals have noted sharp rebound from the multi-month lows hit earlier in the year led by a surge in Copper prices. LME three month Copper prices have rallied more than 50 percent from the January 2016 low of $4,371 per tonne hit in March to hit a two-year high of $6,633 per tonne as on July 13.

Zinc has been a not so close second with prices jumping almost 36 percent from 2016 lows of $1,671 to hit highs of $2,272. The rest of the pack too have noted double-digit bounce from the lows.

Close

The recovery in prices has been fueled by hopes of a revival in global economic health along with the expectations of further fiscal and monetary stimulus measures. Prices have further sought support from weakness in the US Dollar Index.

However, despite most metals managing to hold on to their gains, the pace of gains is faltering. There has been a confluence of mixed factors on the macro front that have led to directionless trade in the past few sessions.

On the global growth front, optimism over V-shape recovery is being questioned following a recent spate of mixed data from top consumers US and China. In the US, a higher number of people claiming unemployment benefits and weaker reading of consumer sentiment is indicating the rocky road to recovery. Meanwhile in China, even though Q2 GDP has shown economy expanded at a faster pace of 3.2 percent following 6.8 percent contraction in Q1, a continuing slump in retail sales data for the month of July is spelling caution.

Meanwhile, on the coronavirus front, positive development on COVID-19 vaccine is being offset by a surge in coronavirus cases globally which in turn is fanning worries of the possibility of back paddling of reopening of economies and even fears of re-imposition of lockdown measures which may eventually hurt the nascent pace of global recovery. On the vaccine front, encouraging data from trials of three potential COVID-19 vaccines, including a closely-watched candidate from Oxford University, have lifted sentiments; Reuters reported. Meanwhile, global cases have crossed 14.6 million with cases rising in hotspots like the US, Brazil and India along with worries over the second wave in nations like Australia, Hong Kong, Japan and Singapore.

Furthermore, support due to record stimulus and weak US Dollar is being offset by lingering US-China tensions. On stimulus front, European Union leaders reached a "historic" deal on a massive stimulus plan for their coronavirus-hit economies at a pre-dawn meeting on Tuesday after a fractious summit that lasted almost five days, Reuters reported.

Focus now shifts to the US wherein congressional Republicans announced plans to seek another $1 trillion in coronavirus economic relief. However, tensions continue to simmer between the world's two largest economies- US and China- as they are loggerheads over varied reasons.

Overall the push and pull due to abovementioned factors may keep metals prices in a narrow range in near-term. However, from a longer perspective, most metals may have become vulnerable to correction as they seem to have outrun their fundamentals.

The author is VP - Head Commodity Research at Kotak Securities.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Jul 22, 2020 12:07 pm
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