Base metals overheated, profit-taking after a strong rally hardly a surprise

Nava Bharat Ventures | Nava Bharat Ventures has acquired 13,66,970 equity shares of itself through open market transaction at a price of Rs 69.98 per share on March 18, the bulk deals data available on the NSE showed. The stake buy represented a 0.77 percent of total paid up equity capital of the company. This news came in after market hours on March 18. Earlier this month, diversified company Nava Bharat Ventures already bought 41,52,847 equity shares, representing 2.35 percent of total paid up equity, through three bulk deals. The stock closed 1.37 percent higher at Rs 70.10 on March 18. It hit a 52-week high of Rs 76.25 on February 26, 2021, and a low of Rs 32.40 on March 24, 2020. The market-cap of the company stands at Rs 1,235.28 crore. In terms of technicals, the current rating by Moneycontrol on the stock is very Bullish. The important support levels for the stock are placed at Rs 67.63-66.02, while resistance is placed at Rs 72.23-75.22, data from Moneycontrol.com showed.

Base metals witnessed some profit-taking before the end of the previous week. Copper slipped after touching another multi-year peak, hit by profit-taking amid worries about a US stimulus deal and a potential collapse in Brexit trade deal talks. Global equities also declined after prospects of a near-term COVID-19 aid funding in the US dimmed and the odds of a disorderly British exit from the EU rose. A lot of good news has already been priced into the market, hence profit-taking after such a strong rally is not surprising and we also have risk-off sentiment in the equities market.

Perspective

Copper has been buoyed by bullish developments, including strong demand from China and possible supply problems. Also supporting metals was a weak dollar index, which touched a two-and-half-year low, making commodities priced in the US currency cheaper for buyers using other currencies. However, with LME copper already leaping 78 percent since March lows and Shanghai prices rallying 65 percent, the contracts may soon run out of steam.

Typically, if you have this kind of excessively bullish mood, and with this stretched positioning in the futures market, a 10 percent correction will not be unusual.

Global copper demand will increase by 4 percent to 23.6 million tonnes in 2021, driven mainly by China's strong appetite after a projected 3.8 percent contraction this year. China’s copper smelters produced 1 percent less copper cathode in November than in the previous month due to maintenance in Shandong, Anhui and other regions. Deliverable ShFE copper stocks fell by 16 percent from the previous week to 82,902 tonnes, lowest level since October 2014.

Aluminium prices rose, underpinned by concerns over supplies as winter restrictions to fight air pollution have begun to hit refining operations in China, while copper recouped early losses. The winter restrictions on refineries fuelled the bullish vibe in the Chinese aluminium market. It remains to be seen how many restrictions will be required should air pollution worsen, while also highlighting robust Chinese demand for the metal.

Cumulative net imports of 332,000 tons in the first nine months of 2020 were 24 percent lower than last year and the lowest January-September tally of any year since 2015. Clearly, China has had no need to step up its purchases from the rest of the world in the way that it did during the last financial crisis or as it has this year for copper and aluminum.

LME registered stocks have risen by 171,500 tons this year and from the LME's new “off-warrant” stocks report, a monthly count of what the exchange terms “shadow” stocks, metal parked there has increased by a further 65,000 tons between February and September, similar to the millions of tons of shadow aluminum stocks that have grown this year.

Nickel hit a 14-month high in London and scaled a contract peak in ShFE, on higher stainless steel prices in China and concerns about supply. Nickel and other base metals in London were also supported by investors turning cautiously optimistic over prospects of an additional US economic stimulus and the extended EU-UK trade talks. The nickel smelter of Eramet SA’s subsidiary in New Caledonia is running low on ore due to widespread protests over the sale of another nickel operation in the French Pacific territory.

Though the stainless steel sector remains the dominant consumer of nickel, non-stainless demand holds the key for growth in the medium and long term. Demand for battery-grade nickel continues to surge, and non-stainless steel demand for nickel is likely to grow by 8 percent to 10 percent in 2020 and 2021. Nickel output in the Philippines dropped 12 percent in the first nine months of the year.

Zinc rallied to the highest since April 2019, lifted by concerns over falling Chinese production and as hopes of a US stimulus deal buoyed market sentiment. Refined zinc output in China, fell to 5,62,300 tons in November, down 6,900 tons from October. Production is expected to drop further in December as falling processing fees crimp margins. Treatment charges for Chinese smelters to process zinc concentrate slumped to the lowest level in more than two years.

Supply constraints have helped fuel a 70 percent rebound in prices from March lows, even as demand took a hit in the early stages of the coronavirus pandemic. Concerns were heightened when Vedanta Zinc International suspended operations at its Gamsberg mine in South Africa.

The ILZSG is predicting a rebound in refined zinc output next year to 13.14 million tons and a rise in demand to 13.52 million tons, suggesting that the market will remain in an apparent deficit. That's a scenario that long-position holders are fervently hoping will come true.

Outlook

The metals rally is getting overheated and while the industry and financial speculators can afford to continue building shadow stocks that may well prove to be the case, but a shock to demand, a surge in supply or a flattening of the forward curve making financing harder could all knock what looks like somewhat artificially supported market from enduring through the start of next year.

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