'Cautiously bullish on copper, medium-term prospects for nickel to remain positive'

The current rally in copper prices seems to be getting stronger, but any negative news could lead to wild swing in the metal.

February 17, 2021 / 03:33 PM IST

Copper prices reversed losses over the last few weeks and had a stellar show to surge to fresh eight-year peak as investors took advantage of a pullback to add to their bullish positions, betting demand will keep outpacing supply. From March 2020 lows, copper is up over 91 percent. Mixed supply-demand dynamics, inflation fears and rising demand for a low-carbon economy will continue to keep copper buoyant.

There was some last-minute restocking by the Chinese ahead of their holiday, so when they come back they'll be able to gear up pretty quickly. Chinese markets are shut for the Lunar New Year and will reopen on February 18. Any dips look to be a good buying opportunity. It does seem to be the start of something, whether it's a super cycle or an extended period of elevated prices. The current rally in prices seems to be getting stronger, but any negative news could lead to a wild swing in the metal, hence cautious bullishness is advised.

A strong economic recovery, increased push for renewables, depleted inventories and the supply challenges all together are keeping the sector well positioned. China continues to drive growth in demand. Fixed Asset Investment growth looks resilient for all the key sectors. Grid investment is picking-up quite well, construction is rising and auto sales are seeing double-digit growth. Copper demand has been boosted by strong investment in renewable energy and electric vehicles (EV). EV sales continue to race ahead. However, investment in recharging infrastructure is what is benefitting copper demand.

Other industrial metals also boosted after US Treasury Secretary Janet Yellen urged G7 finance leaders to "go big" with additional fiscal stimulus, raising hopes of a quick global recovery from the COVID-19 pandemic. Markets also cheered ongoing coronavirus vaccine rollouts globally and positive GDP reports, with Japan's economy expanding more-than-expected and Singapore's economy contracting less than initially estimated in the fourth quarter.

Zinc prices continued to add gains and round out its best weekly performance since November on prospects for strong steel demand after the Lunar New Year, even though the holiday break in China drained volumes from the market. Prices for zinc, used in galvanising, rallied in the tailwind of steel, which has firmed on expectations of strong demand after the New Year break, and as countries look to boost infrastructure spending to offset the COVID-19 economic malaise.

Close

Nickel has been a show stopper for the year with sustained gains for the last few months and hitting a new record for 2021. The metal has been putting in a strong performance despite expectations of demand slowdown due to the Chinese New Year holiday, up over 11 percent since the turn of the calendar year and over 6 percent in February to over $18,750 per tonne levels. The vast majority of global nickel production is consumed by the stainless steel industry, with a lesser - but growing - amount destined for electric vehicle batteries. Nickel provides the primary pricing component for austenitic stainless steel surcharges, with surcharges typically being calculated on a one-to-two-month rolling average. Prices are gradually approaching key levels that could spur investment in new supply.

Rising demand expectations pertaining to the electric vehicle battery sector, as well as strengthening macroeconomic conditions that led to higher consumption of raw materials for making stainless steel. Nornickel, the world's second-largest producer expects nickel market is expected to be in a surplus of around 75,000 tonnes this year; supply would still need to increase by 4 percent to keep pace with demand. We remain positive about the medium-term prospects for nickel.

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.
Navneet Damani is the VP – Commodity Research at Motilal Oswal Financial Services.
first published: Feb 17, 2021 03:33 pm

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