Base metals could correct in near term

A strong global economy, however, may make this a medium-term buying opportunity

The boom in industrial metals has run into a roadblock that is hard to assess. As activity resumes across the globe, the demand for steel, copper, zinc, aluminium, tin, etc., has shot up. Since supply chains have also been disrupted, this has led to a big rise in prices.

This week, the world’s largest consumer, China, announced it would pull prices down by releasing some of its reserves of copper, aluminium and zinc. It had already imposed price controls on iron ore. In the last year, copper has more than doubled to record highs, and aluminium and zinc are at 10year highs.

Iron ore and steel were also at record highs. what happens to non-ferrous metals as a result? China is estimated by Citigroup to hold 2 million tonnes (MT) of copper, 800,000 tonnes of aluminium, and 350,000 tonnes of zinc. This is about two months’ worth of China’s refined copper consumption, but only 2 per cent of its aluminium usage and 5.2 per cent of its annual zinc consumption.

China says it will release some of these holdings in public auctions but there are no details. Just as a reaction to the announcement, copper futures on the London Metal Exchange were down 7.6 per cent, the biggest fall since global lockdowns in March 2020. Copper also dropped 2.5 per cent on Shanghai Futures Exchange. Aluminium, Zinc and Nickel too have fallen.

At the same time, the US dollar has strengthened after the latest Federal Reserve Monetary Policy update, so international prices could fall more. China may not sell a very high proportion of aluminium and zinc consumption.

However, any surplus over anticipated demand – even a 2 per cent surplus – can cause a sharp drop in prices. This is especially true since some shortages are seen to be temporary with supply expected to rise as supply chains return to normalcy. Hence, China selling even one week’s worth (2 per cent of annual consumption) could result in a drop.

However, the global economy has surprised with the fast pace of recovery. Demand could be higher than estimated. In that case, after a temporary cooling off, prices will rise again.

Hindalco has seen 150 per cent rise in share price over the past 12 months and a 7.5 per cent fall in the past week. Vedanta has seen 139 per cent rise in 12 months and 8.5 per cent drop in the last week. Hindustan Zinc has seen 84 per cent rise YOY and fallen 4 per cent week-on-week. Hind Copper has risen 363 per cent YOY and declined 15 per cent in the week. All of them could see deeper corrections, but a strong global economy may make this a medium-term buying opportunity.