Commodities, especially base metals, are showing signs of weakness following concerns over China’s growth and increasing uncertainty in the eurozone.
The Thomson Reuters/Jefferies CRB Index, which tracks 19 commodities globally, has been on a rollercoaster ride since 2011. After hitting a high of 370 in April 2011, the index fell to 294 in mid-December last year. The fact that liquidity is driving up prices became evident after the European Central Bank (ECB) announced a package of unlimited three-year credit for banks at a rate of 1% on December 21, 2011. The index hit a high of 325 this February from its lows of December as the ECB injected more than €1 trillion into Europe’s financial system.
But the buoyancy was short-lived as the index has since lost steam after China cut its growth forecast for the current year from 8% to 7.5% — its lowest level since 2004. Given that China consumes around 40 % of the world’s copper, zinc, aluminium and nickel, any slowdown in demand is expected to increase the downside risk to prices. Morilla-Giner, who runs London & Capital’s $320-million Global Commodities Fund, was quoted by Reuters as saying, “If we don’t see more stimulus and data that is sort of good but not great, then the volatility is not going to go away. The scope for disappointment is always going to be huge.”
Though talks of supply concerns seem to be providing some support to prices of aluminium, copper, nickel and tin, analysts do not see the trend lasting for long as traders are wary of building long-term positions on the London Metal Exchange (LME), given the bleak demand outlook. Standard Chartered analyst Judy Zhu is ‘mildly bullish’ on base metals.
Closer home, too, the outlook is far from comforting. Gautam Chakraborty, analyst with Emkay Global Research, feels base metal prices in India will be impacted by movements on the LME. As per reports, inventories tracked by the LME were at the lowest level since July 2009 after having slumped 24% this year. Further, the slowdown in capex spend by India Inc and policy issues in the infrastructure sector are expected to keep base metal prices under check. “There is a dearth of demand owing to bottlenecks in infrastructure projects. Besides, production capacity is being added steadily, leading to a demand-supply mismatch. So, prices of steel will remain stable for a while, with a little bit of a downward bias,” Chakraborty concludes.