Metals rally could be short-lived as real demand is still patchy

After a stellar run-up in metals by 20–30 percent in the past month, there is now a much deserved pause in this commodity space. The strength in US dollar vs the Japanese Yen and the Euro signals a risk-off mode, which continues to impact all asset classes. The US dollar has declined by 5 percent in the last month leading to a rally in risky assets.The prices had gained momentum from the positive sentiment and confidence over measures taken by China to boost the economy. The (measures) have already started to show results. Any policy measures taken in China, the top consumer for most commodities, would impact commodity prices. Reports that China was restocking metals at lower prices began boosting the prices higher. So did the higher steel production, and with that came in a lot of metal buying in exchange-traded funds, followed by speculative activity. Gains of 50 percent in crude oil prices from February also led to support in other commodity prices. China, on Friday, took steps to cool off the metals markets, as Shanghai Exchange increased steel transaction fees and the Dalia Commodity Exchange raised the iron ore margin. In the week before, steel prices had gained 14 percent and iron ore prices went up by 16 percent. This year, ore prices are up by almost 60 percent, by far the best performing commodity, while steel prices are up 47 percent year to date. The gains in metals were factored in after major miners like Vale, BHP Billiton ad Rio Tinto forecast a decline in production this year. The non-ferrous metals also saw strong gains in the past month with aluminium at an 8-month high, zinc at a 10-month high and copper at a 1-month peak. All the metals are up in double digits for 2016.While the sentiment has run ahead, the real demand still remains patchy and would lead to corrections. Also, at higher prices, many capacities that were kept on hold or shut down may come back, though in a slower pace. There are reports from Australia contemplating import duty on types of Chinese steel to stop surplus production from getting exported into the country.A note from Goldman Sachs also puts in a word of caution to the current rally. Sachs feels that a more sustainable recovery would come in by Q3 until sharp moves on both sides are not ruled out. In the near-term, one must watch out for central banks' meetings this week from the US Fed and Bank of Japan on their stand on interest rates which would move the markets.