Base metals market was severely impacted by the COVID-19 lockdown in April and May but several downstream industries have resumed operations which will change the demand scenario in June. Rating agencies, miners, metal producers are revising their outlook and production guidance for 2020. June will give a clear picture as most countries end the lockdown and economic activities restart in a gradual manner.
Outlook for base metal is positive according to Sugandha Sachdeva, VP-Metals, Energy & Currency Research, Religare Broking. In an interview to Davis Index Sachdeva shares her insights on the base metals market.
- Could you delve on your outlook for base metals complex in June?
The outlook of base metals has been improving in the recent weeks and the undertone remains positive in the near term. Various macroeconomic factors are playing out, which have led to revival in prices from extremely oversold territory. First, it’s the easing of lockdown restrictions across several economies which has boosted sentiments for industrial activity as well as the demand outlook. Second, the unprecedented amounts of global stimulus, including from China, the top consumer of base metals has brought about optimism in the financial markets and also for the base metal complex. Third, it’s the upbeat manufacturing data from China and a milder-than-expected response by the US President on China’s security legislation for Hong Kong that has soothed the market nerves.
Markets are also finding solace in the fact that the US has not pulled out from the Phase I trade deal signed in January. On the economic data front, even though the US GDP data has witnessed a sharp contraction in the first quarter, China’s factory activity surprisingly indicated expansion in May, which has reinforced the prospects of a further upswing in prices. This upside is likely to continue in the near term as the demand equation improves and as markets are also pinning their hopes on further Chinese stimulus. Prices will however also take further cues from the dynamics of the US-China trade relations.
Has the metals market improved? Most major miners have resumed operation, recently?
Yes, the market for metals has improved as major mining companies have resumed operations. Though the resumed activity could result in increased supply in the market, low prices and expectations of improvement in demand amid easing restrictions could underpin prices in the near term. Also, since most of the mines are not operating at full capacity, it would prevent the market from being hugely oversupplied. After reopening of major economic hubs in Europe, the US and Asia, at least 33 more countries have eased restrictions around the globe and many others are expected to follow suit in June. As demand is likely to pick up in response to restart of economic activity, industrial metals would start to gradually inch higher.
Another pertinent point is that China has been taking a lot of measures to offset any damage to mining production. The state has implemented quota for mined materials in the first half of the year at 66,000mt, which is 10pc higher than in 2019, and half of 2019’s end-of-year mining total of 132,000mt. Also, only one-fifth of the country’s rare earth miners have returned to work, since the outbreak. Some of South Africa’s mines have re-opened, but are permitted to operate at 50pc capacity to prevent any damage from the virus on the country’s crucial mining sector. Peru’s copper mine production is also expected to contract by around 11pc in 2020.
Where do you see the prices in the coming months on the domestic and global front?
Most base metals bottomed out in the month of March and have witnessed a sharp retreat in the past two months on both domestic and global front, where copper has been leading the space with gains of over 20pc, followed by Zinc (17pc) and Nickel (15pc). This can be attributed to the supply constraints amid mine closures alongside improving demand from China which has signalled early signs of recovery after the global pandemic. Lead and Aluminium are still lagging behind due to the supply glut. However, the recent rally is likely to be capped as the situation across the globe is still meek.
COVID-19 is likely to trigger recession for major economies and overall demand is likely to take a long time to reset itself. Most of the base metals are likely to witness a surplus build up this year. The U.S. GDP contracted by 5pc in the first quarter of 2020, the largest since 2008. Also, brewing tensions between the US and China with uncertainty over trade war Phase 1 deal is likely to keep base metals prices under check. The US could impose further sanctions on Chinese goods, which is the major downside risk for industrial metals segment. In a nutshell, momentum is expected to be positive in the near term, but for coming months upside is likely to be limited.
On the domestic front, copper prices look primed to test higher levels of around Rs440-445/kg ($5,800/mt at LME) whilst zinc can test Rs172-175/kg or $2,200/mt at LME and Nickel Rs1,030/kg ($14,000/mt). Aluminium and lead are expected to remain subdued in the near term, where they can witness limited upside towards Rs140/kg ($1,650/mt) and Rs141/kg ($1,750/mt), respectively.