Base Metals Monthly Report

Friday| July 12, 2013

Base Metals fall - Surplus expectations, high inventories

Angel Commodities Broking Pvt. Ltd.

Reena Rohit Chief Manager Non-Agri Commodities and Currencies reena.rohit@angelbroking.com (022) 3935 8134

Anish Vyas Research Analyst Non-Agri Commodities and Currencies anish.vyas@angelbroking.com (022) 3935 8104

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Base Metals Monthly Report

Friday| July 12, 2013

Base metals fall - Surplus expectations, high inventories

With expectations of an output surplus in case of aluminum aluminum, copper, zinc and nickel in 2013, the trend in base metal prices is bearish. The month of June13 witnessed a sharp decline in prices and factors that affected price movement range from the annual surplus expectations to increase in LME inventories, slowing demand growth in China and overa overall bleak economic prospects among emerging and developing economies. Prices in the last month have also reacted to the announcement by the Federal Reserve Chairman Ben Bernanke that the central bank would now begin its tapering of the stimulus spending pr program. Markets went in panic mode on the back of this development and commodities from precious metals to base metals and energy products, all witnessed sharp selling pressure. On the LME, base metals slumped sharply vis vis--vis that on the MCX, as the currency ency factor influenced each of these markets differently. While for base metal prices on the LME, a stronger Dollar Index added downside pressure, on the MCX platform, sharp losses in prices was cushioned on the back of Rupee depreciation. Major losses were e seen in copper, aluminum and nickel prices on the LME, with monthly losses in June13 to the tune of around 7 percent each.

LME Base Metals June Performance (%)

0.00 (1.00) (2.00) (3.00) (4.00) (5.00) (6.00) (7.00) (7.0) (8.00) Copper LME Aluminum LME Lead LME (6.7) (6.5) (7.4) Nickel LME Zinc LME
(2.00) (3.00) 1.00 3.00 2.00

MCX Base Metals June Performance (%)

2.4

(3.5)

0.00 (1.00)

(0.8) (1.3)

(2.8) Copper MCX

(2.6) Al MCX

Lead MCX

Nickel MCX

Zinc MCX

On the MCX too, copper, aluminum and nickel prices declined sharply but the monthly losses were limited between 1.3 3.0 percent. cent. The Rupee factor has played a crucial role in the past month and this was especially seen in the performance of zinc prices. While on the LME zinc prices lost around 3.5 percent, on the MCX, the commodity witnessed a totally divergent trend and inste instead increased 2.4 percent in the same period. Here again, Rupee depreciation came in as a savior and prevented prices from correcting sharply. Apart from slowing demand-supply supply fundamentals, industrial metals are also facing the heat of a sudden reversal in economic growth of emerging and developing economies, especially China. Also, the impact of monetary policy changes is leading eading to volatility in prices.

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Base Metals Monthly Report

Friday| July 12, 2013

Nickel is the worst performer amongst base metals, loses 20 percent year year-to-date date
Base Metals YTD Performance (%)
0.00 (2.00) (4.00) (6.00) (8.00) (10.00) (12.00) (14.00) (16.00) (18.00) (20.00) (19.7) (14.8) (14.2) (9.5) (8.8) (10.4) (11.8) (12.6) (3.5) (3.7)

Year-to-date, base metal prices have witnessed a sharp decline. decline And similar to the monthly performance, year-toyear date as well, prices in the domestic markets has received respite from declining sharply on the back of Rupee depreciation. Amongst the other base metals, nickel has seen the sharpest fall as the metal has corrected almost 20 percent nt since the start of the year on the back of sharp increase in inventories, expected surplus for 2013 and a slowing demand scenario.

Second-quarter quarter witnesses major downside pressure

LME Quarterly Performance (%)
(2.00) (4.00) (6.00) (8.00) (8.0) (10.00) (12.00) (14.00) (16.00) (18.00) Copper LME Aluminium LME Lead LME (17.7) Nickel LME Zinc LME (10.2) (9.5) (5.2) (6.7) (8.5) (2.5) (2.5) (2.2)

MCX Quarterly Performance (%)

7.9 7.00 5.00 3.00 1.00 (1.00) (3.00) (5.00) (7.00) (9.00) (11.00) MCX copper (6.9) (9.6) Al MCX (10.6) Lead MCX Q1 2013 Q2 2013 (9.7) Nickel MCX (10.3) Zinc MCX (2.8) (3.3) 0.9 7.3

Q1 2013 Q2 2013

If quarter-wise wise performance of base metals is seen, it shows that the second second-quarter quarter of the current calendar year was witness to major downside pressure. Losses in nickel were mainly seen during the 2Q2013 and the metal touched a low of $13525/tonne. Quarterly uarterly performance of nickel was better than that in the international markets as a weaker Rupee protected sharp downside. MCX Nickel prices slipped only around 10 percent during the second second-quarter as against an 18 percent decline in the international markets. Lead and zinc prices have witnessed a divergent trend on the MCX platform platform, as during the 2Q2013 lead and zinc prices on the LME slipped more than 2 percent but in the Indian markets these commodities witnessed an increase of more than 7 percent. During the 2Q2013, the Rupee had depreciated by more than 10 percent and this was a major factor that drove a rise in prices on the MCX.

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Base Metals Monthly Report

Friday| July 12, 2013

Copper
Copper Prices v/s LME Inventories
7,500 7,400 7,300 7,200 7,100 7,000 6,900 6,800 6,700 648,000 638,000 628,000 618,000 608,000 678,000 668,000 658,000

LME Copper Future ($/tonne)

Copper LME Inventory (tonnes)

The above chart shows that, while copper prices on the LME have declined over the month, inventories on the LME ME in the same period have witnessed an increase. The he threat of an oversupply looms over copper prices and the increase in inventories on the LME acted as an additional negative factor. Over the year, inventories on the LME have increased more than 100 percent cent but that on the SHFE have slumped by almost 16 percent. Inventories built-up up on the SHFE over the last year are being drawn down due to a couple of factors. Firstly, a decline in prices attracted a rise in spotspot buying of the metal by semi-fabricators fabricators.

Copper Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 YTD

LME Inventories (%) 16.2 20.2 27.6 8.6 (1.6) 9.4 106.2

SHFE (%) 0.2 1.3 19.2 (12.3) (17.4) 1.8 (15.5)

LME Prices (%) LME Avg. Prices ($/tonne) 3.2 (4.7) (3.6) (6.6) 3.4 (7.0) (14.8) 8,090 8,099 7,691 7,251 7,274 7,034 7,534

Another factor contributing to the decline in Shanghai inventories is that traders have exported copper to Asian LME-registered registered warehouses mainly in Johor and Malaysia. Export of the red metal was in response to the attractive price differentials and incentives offered by the warehouse operators in order to store the metal in rent deals. Hence, on the back of this drawdown in inventories coupled with a weak economic scenario, apparent copp copper er consumption in China is witnessing a decline. For the year, estimates by the EIU (Economist Intelligence Unit) indicate that demand growth for the red metal will slow to 2.8 percent in 2013, with major demand slowdown to be seen in China on the back of drawdown in inventories which will eventually depress demand. The supply-side side growth is expected to be buoyant in 2013 to the tune of 3.2 percent after accommodating the disruptions allowances caused by unplanned cutbacks in production. Keeping the expected ted increase in copper output in mind, it is forecasted that the world copper market will witness a surplus of 129,000 tonnes. In 2014 too, a surplus is expected to the tune of 150,000 tonnes, indicating slow growth on the consumption front.

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Base Metals Monthly Report

Friday| July 12, 2013

Copper Quarterly Demand declines and production witnesses sharp increase

(000 Tonnes) World Mine Production World Refined Production World Refinery Capacity World Refined Usage Refined Metal Balance Adjusted) 2012 3851 4934 6163 5246 -307 2013 4262 5189 6498 4966 231 % Change 10.7 5.2 5.4 -5.3

(Seasonally

Source: Mint, ICSG

The International Copper Study Group declares copper surplus

Preliminary data by the ICSG (International Copper Study Group) showed that the world copper market is in a state of surplus amid a slowdown in consumption growth. For the 1Q2013 (first-quarter), (first refined copper balance shows a seasonally adjusted surplus of 231,000 tonnes, while in the same period last year, a production deficit of 307,000 tonnes was seen. Moving from a scenario of deficit to surplus has led copper prices witness a sharp downside and the slowing economic growth of China is acting as a major negative factor. World usage of copper during 1Q2013 declined around 5.3 percent over the same period last year. Majority of the decline in consumption was seen in China, with demand in the 1Q2013 falling 10 percent and net imports of the red metal declining 46 percent. Excluding Chinese demand, overall demand slipped about 1.7 percent. Region-wise, wise, consumption fell in the same period by 7.8 percent in Africa, 1.8 percent in America, 7.6 percent in Asia, 0.2 percent in Europe and 14.3 percent in Oceania. While demand growth slipped, copper mine production and refined output witnessed an increase. Mine production during ring the first three months of 2013 jumped significantly by 11 percent as against the same period last year. Recovery in production levels from last year contributed to the rise in mining activity. Chile, the worlds largest copper producer saw a rise of 7.7 percent growth in mine production. Average world mining capacity in 1Q2013 increased to 82 percent from 77 percent in 1Q2012. Refined copper production increased more than 5 percent in 1Q2013 as against last year, with primary production rising 3.8 percent cent and secondary output increasing 11.6 percent.

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Base Metals Monthly Report

Friday| July 12, 2013

Aluminum
Aluminum prices on the LME witnessed a sharp decline of almost 7 percent in the last month and the metal tested a monthly low of $1758/tonne. Although aluminum prices opened the month of July13 uly13 on an upbeat note and tested a high of $1852/tonne, prices could not remain steady around those levels and slipped below the $1800/tonne mark. Additionally, we saw LME aluminum inventories gaining around 5 percent on a monthly basis and stood at 54,50,175 54 tonnes th on 28 June 2013, as against 51,98,375 tonnes on 31st May 2013. On a quarterly basis, inventories s rose around 4.2 percent in Q22013. Q2

Aluminium Prices v/s LME Inventories

5500000.00 1950.00 1900.00 1850.00 1800.00 1750.00 5450000.00 5400000.00 5350000.00 5300000.00 5250000.00 5200000.00 5150000.00 5100000.00 5050000.00

LME 3 month Aluminium Future - $/tonne

AluminiumLME Inventory (tonnes)

On a year to date basis, prices fell sharply by more than 14 percent as a result of concerns over global economic growth coupled with rising trend in inventories. Even strength in the Dollar Index to the tune of 4.5 percent acted as a negative factor. For the Q22013, prices have plunged around 7 percent in dollar terms. On the domestic bourses, prices dropped 2.6 percent in the last month month, but sharp fall in prices was prevented on account of Rupee depreciation. The domestic currency weakened by more than 5 percent in the month of June13. In the current year, prices fell by 8.8 percent on the MCX, and further downside was cushioned as a result of depreciation in the Rupee. For the second quarter of the current year, prices gained 0.9 percent taking cues from sharp depreciation of around 10 percent.
Aluminium LME Inventories (%) Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 YTD (1.0) 0.1 1.5 (1.5) 0.9 4.5 4.0 SHFE (%) (2.5) 9.4 7.1 (7.4) (6.4) (8.5) (10.5) LME Prices (%) LME Avg. Prices ($/tonne) 1.4 (4.3) (5.2) (1.8) 1.8 (6.7) (14.4) 2,075 2,096 1,952 1,894 1,865 1,856 1,948

Year-to-date, date, inventories on the SHFE have increased by 4 percent and that on the LME have slumped more than 14 percent. Average prices on the LME have declined from $2075/tonne in Jan13 to $1856/tonne in June13. April13 onwards, inventories on the LME have declined considerably, especially during the month of June13 when inventories slipped 8.5 percent, but prices also corrected as a result of weak market sentiments.

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Base Metals Monthly Report

Friday| July 12, 2013

Fundamental undamental factors that pressurized Aluminum prices

Major reason ason for the downside in aluminum prices was witnessed during the month of June13, as a result of increase in global aluminum production to 2.112 mi million llion tonnes in the month of May13. May13 Production of aluminum rose when compared to revised figure figures of 2.052 million tonnes for the month of April13. Thus, there was a surplus in the market on account of excess production and adding downside pressure on prices. Further, slow economic growth in China hampered demand for the metal. Chinese Gross Domestic Product (GDP) also grew at a slower pace and played a major role in consumption of base metals and thereby led to concerns for demand from the Chinese economy. Apart from that, Chinas daily production increased to 57,000 tonnes in the month of May May13 as against a previous rise of 56,900 tonnes in April April13. . Total production stood at 1.766 million tonnes for the month of May13 with respect to 1.707 million tonnes a month ago according to the data published by the International Aluminum Institute (IAI). However, sharp downside in the prices was cushioned on account of decline in average production to 126,700 metric tons for the month of May from 127,000 metric tons in April. Further, daily average production of primary aluminum output excluding China also fell to 68,100 tonnes in May when compared to 68,400 tonnes in April as the per the IAI report. Additionally, IAI report showed that Europe produced 2.38 million tonnes of chemical grade alumina between January 2012 and June 2013 and contributes around one third of f total chemical alumina production over the world. This factor also prevented sharp fall in the prices.

Outlook
Although fundamental factors like concerns over weak economic growth in China, overall increase in inventories and a situation of surplus in ca case of most of the metals would remains as bearish indicators for base metals, latest remarks by Federal Reserve Chairman Ben Bernanke that an accommodative policy in the US would continue has led to a re re-emergence emergence of risk appetite in the global markets. On the back of this, the Dollar Index is expected to weaken and sentiments in the world markets will also remain upbeat on stimulus hopes. On the back of this, the trend in base metal prices over the next 15 days is expected to be positive.

Technical Levels (15 Days)

MCX Copper MCX Zinc MCX Lead MCX Aluminum MCX Nickel S2 390 106 116 101 750 S1 405 110 121 104 790 LTP 422.85 113.40 125.75 108.55 826 R1 430 117 130 112 870 R2 440 121 136 116 950 Trend Up Up Up Up Up

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