Metals drift down on China’s growth concerns

The global commodity markets witnessed mixed activity last week with divergent price action. Resurfacing of macroeconomic pessimism proved negative for a number of growth-driven commodities especially industrially oriented base metals.

With trepidation, the market is focused on growth outlook for the world’s largest consumer China. Interestingly, growth concerns did not affect the energy markets. Brent crude surged past the $115 a barrel mark in the wake of renewed apprehensions of geopolitical tension associated with Syria; and the differential with WTI widened.

As for precious metals, both gold and platinum retreated from their goals of $1,800 and $1,700 an ounce respectively. The agricultural markets were somewhat buoyed by the USDA report which propped grain markets up under the lead of corn whose inventory is tightening. There is no sign as yet of demand rationing.

Specifically, the entire metals complex was down over the week. Gold prices slid by 1 per cent and silver by 3 per cent. The base metals market entered LME Week with a further price slide. Zinc, lead, nickel, aluminium, tin and copper all were down with declines ranging between 7.1 per cent (zinc) and 2 per cent (copper). Zinc fell below $1,900 a tonne while nickel dropped 3.7 per cent to test $1,700.

What’s the outlook for the rest of the year? Global growth concerns are back in focus. The initial euphoria caused by QE3 has petered out as hard realities hit market participants. The demand outlook is sluggish, aggravated by slowdown in China. There is inventory overhang in case of commodities such as copper. The OECD leading indicators confirm the widespread slowdown in economic activity. Even as prices struggle to find upward traction, there is risk of prices declining to pre-QE3 levels.

Whether there will be a renewed chorus against what is seen as excessive speculation in the global commodity markets remains to be seen. The Finance Minister has called for ‘decisive action against speculation and excessive financialisation of commodity prices’. If experience is any guide, nothing much will come out of these noises.

Gold: With the momentum generated by QE3 petering out, gold prices have been struggling to find upward traction. With the onset of harvest and festival season in India, some pick up in physical demand is seen. Yet, stubbornly high gold prices have upset consumers who are now looking for alternatives.

A weak rupee has pushed the landed cost of gold so much higher. In China too even after weeklong holidays, activity has not picked as anticipated. Concerns over the growth prospects are real. At the same time, China’s domestic gold production has been expanding rapidly, making imports less-relevant.

In London Friday last, gold PM Fix was at $1,767/oz, little changed from the previous day’s $1,769/oz. Silver fell to a Friday AM Fix of $33.79/oz versus the previous day’s $34.25/oz.

Investment demand for gold is yet to show signs of a robust pick-up. Although the overall macro picture is gold-supportive, gains are most likely to be moderated. There will be profit-taking at every increase in price. Silver lacks support from industrial demand.

According to technical analysts, dips in gold provide better levels to buy for a move toward 1,800. Above 1,800 would open the next higher target of 1,835. For silver, support near 33.30 should justify a bullish outlook. Look for a break above 35.40 to confirm upside toward the next higher targets of 37.50/38. The medium-term outlook is said to be bullish.

Base metals: Weak global growth expectations are taking a toll on the base metals complex. Slowdown in China, the mover and shaker of this market, triggered the price pullback.

Varying market fundamentals of different base metals suggest that price performance will be divergent. The past week saw broad move lower across the complex, with significant weakness seen in aluminium, nickel and zinc whose prices have fallen by as much as 6-8 per cent from the recent highs.

The most significant weakness is seen in aluminium given that the market is in a state of oversupply. Analysts are revising their price forecast down.

On the other hand, although copper, tin and lead prices are currently under pressure following weak sentiment, any improvement in industrial activity has the potential to pull the market up.

According to technical analysts, the aluminium market is looking for a base around 1,988 following the near-term down-move.

Above 2,065 would confirm upside scope. Support near 8,080 underpins upticks in copper toward 8,350. The medium-term outlook is said to be bullish.

Crude: Prices have drifted higher breaking out of their relatively tight trading range. Despite global growth concerns, crude prices (Brent) have surged because of geopolitical developments.

To be sure, this does not make out a case either to aggressively short the market or go aggressively long. Fundamentally, the market continues to be fairly balanced.