Base metals were quite volatile last week with bouts of correction in the interim after a fresh coronavirus outbreak in China, which accounts for more than half the world's metal consumption. Further, business activity numbers in Europe, which are at their weakest level since the recovery began in July and worries that the stimulus program of the incoming US administration may fall short of expectations, have added to the volatility. The market seems to be hitting the buffers here, as commodities have had a phenomenal run, and that just calls for some profit taking for correction.
Copper was largely supported amid positive economic cues for the week, though some selling emerged later in the week. Some cracks were witnessed with fall in stock markets and oil prices as poor economic data and new coronavirus restrictions in China, weakened the outlook for economic growth and demand. But losses eased after US factory figures showed activity surging to its highest level in nearly 14 years in early January.
The US housing starts soared by 5.8 percent to an annual rate of 1.669 million in December from the revised November estimate of 1.578 million. With the much this increase, housing starts hit their highest level since reaching a rate of 1.720 million in September of 2006. The Philly Fed diffusion index for current activity soared to 26.5 in January after slumping to a revised 9.1 in December. The US initial jobless claims fell to 9,00,000, a decrease of 26,000 from the previous weeks revised level of 9,26,000. ECB left its key interest rates and asset purchases unchanged on Thursday and reaffirmed its willingness to adjust the policy tools when needed.
A coronavirus outbreak in China and the upcoming Chinese Lunar New Year holiday may curb industrial activity. This and slow progress suppressing the virus in Europe and the United States are forcing investors to reassess copper's near-term outlook. Copper's rapid recovery in recent months is expected to pause in the short term, but it will pick up momentum after the Chinese New Year holiday as demand gradually overtakes supply leaving the market with a substantial deficit. Reasons for the expected lull include scrap, which typically starts to emerge at high prices, and the risk of wider lockdowns undermining industrial activity in the first quarter.
However, most important is slowing copper demand growth in China where imports have levelled off ahead of the Lunar holiday in February when many factories close. China imported record volumes of unwrought copper and copper products last year, but the December number fell for a third consecutive month to 5,12,332 tonnes. There isn't going to be a lot of impetus from China to take the market forward until March. China's share of the copper market at 55 percent is now even bigger than it was because its consumption rose last year and almost everywhere else declined.
Copper supplies are expected to rise this year as COVID-related problems are likely to end, but with prices at elevated levels the potential for disruptions remains as mine workers seek higher wages. This, alongside sliding stocks in LME registered warehouses at 87,725 tonnes, which have more than halved since October and are at their lowest since September, will support copper. Low stocks will help propel prices higher later in 2021.
Nickel prices have been having a roll since last few months and the momentum continues for this month as well. Nickel's dramatic rally is being fed by hype over electric vehicles and faces a challenge from new sources of supply in the coming years. LME prices has risen by about 70 percent since its low last March to $18,480 a tonne, as speculators bet it will benefit from rising sales of electric vehicles — which are increasingly using batteries with a higher nickel content. Forecasts of sharp electric vehicle (EV) growth, encouraged by policymakers' push for a "green" recovery, have lifted a range of input metals in recent months, including copper and lithium. It is EV hype. If one looks at the supply/demand balance last year there was a significant surplus, and we expect surpluses this year and next. Just 8 percent of refined nickel demand comes from batteries, while more than two-thirds comes from the stainless steel industry.
A lot of the stimulus is green energy-focused so that's why we have seen hype coming into the space. But there is caution on nickel's future due to the amount of investment in new supply. New projects coming in Indonesia, Africa, Canada and the US are expected to cause a continuing surplus of the metal.
Aluminium fundamentals have been an interesting take over the last few months. While production has been on a rise, prices have also been rising creating a mystifying market scenario. The COVID-19 recovery has been led by China, where booming demand has seen the world's largest producer turn net importer of primary metal this year. China's giant aluminium smelting sector responded to soaring local prices with a 1.8-million tonne lift in annualised production over the second half of 2020. November saw annualised run-rates exceed 39.0 million tonnes for the first time ever.
This supply surge is coinciding with a wind-down in demand ahead of the Chinese Lunar New Year holiday period, with rising expectation of prices to weaken over the coming weeks and months as the market digests the extra production. China's seemingly infinite ability to bring on new capacity has been the single largest hindrance to any sustained price rally. Things, however, may be changing, with even Chinese producers now talking about peak aluminium production.
With some profit taking in equities and sell-off in risky assets, industrial metals are bound to be under some pressure in the short term. There are select metals which have run ahead of market comfort zone like aluminium, and they are bound to see some change in trend. For others, there could be some excess froth being taken off and buying could resume. But for this week, we remain cautious to negative on the metals.
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