Supply squeeze and demand upturn will keep base metal prices up

REUTERS/Danish Siddiqui - RTX30FXQ

Mounting demand and supply constraints supported by liquidity thrust of the central banks will fuel the metal prices rally in the current fiscal. Base metal prices have been escalating in the last few months and analysts reckon several of them will touch a new high in the coming months.

Copper and tin prices have vaulted 100% year-on-year, thanks to high consumption and supply shortfall. Other metals, such as nickel, zinc and aluminium, are not far behind rising by 40-70% in a year.

Rebound in demand from China, the largest buyer of metals, has led the recovery in metal prices. The two big countries - China and the US - have started spending more on infrastructure development, positively impacting the metal sales. The stimulus packages announced in China in mid-2020 aimed at boosting investment expenditure led to an upsurge in construction activities in the country.

The demand upturn has happened when there have been supply disruptions in several mining and manufacturing countries. "Many smelters in China have been closed because of environmental reasons. As a result, they have started buying finished products instead of concentrates," said Kishore Narne, head , commodity and currency, Motilal Oswal Financial Services.

Besides, there are supply concerns from South American countries especially Chile, Peru and Brazil. Strike threat looms large in the biggest mine in Chile.  Chile is the largest producer of copper followed by Peru. "Philippines has tightened supply of nickel because of environmental issues," Narne added. Indonesia and Philippines account for major supply of nickel globally.

Liquidity push by the central banks in major countries have supported the economy growth, spurring the increase in the prices of base and precious metals, said Prathamesh Mallya, AVP research, commodities and currencies, Angel Broking Ltd. "As long as liquidity infusion by Central Banks continue, the metal prices will remain high."

While the faltering supply and rising demand will drive the metal prices up in the short term, the demand for electric vehicles and batteries will ensure persistent consumption of metals such as copper, aluminium, nickel, lithium etc., according to Narne.

Electric vehicles use up to two times more copper than in a regular car. Nickel and lithium find increased consumption in batteries. "Electric vehicles will feed long-term growth story of several metals," Narne said. Smartphone is another segment that boost battery use.

He expects further upside in copper and nickel prices in the current year. From the current level of $10,253.50 per tonne in London Metal Exchange (LME), copper prices are expected to reach $12,000 per tonne given the rising demand. Narne reckons that aluminium prices at $2422.50 per tonne could have plateaued and may not witness much spike in the coming months. Nickel, too, may rise further by 15-20% from the current $17,180 per tonne.

Yet another reason pointed out for the costlier base metals is the declining refining or treatment expenses for converting concentrates into finished products. Smelters in several mining countries had to reduce charges to maintain raw material flow. Dwindling refining cost led them to trim output causing further disruption in supply.