Base Metals Monthly Report, 7th August 13

Base Metals Monthly Report
Wednesday| August 7, 2013
Base metals recover in July13 but short short-term trend remains bearish
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 recover in July13 but short-term trend bearish

Amid demand growth concerns and a slowing Chinese economy, the major consumer and driver of base metals demand, prices last month witnessed an increase. While in the international mar markets, a weaker Dollar Index supported upside, prices on the domestic front took further cues from a weaker Rupee and witnessed gains. Expectations with respect to the Federal Reserves move towards the QE tapering were mixed in the last month on the back o of f indication by Chairman Ben Bernanke that an accommodative policy was needed to boost the US economy. This factor supported market sentiments, thereby leading to weakness in the Dollar Index, which in turn was supportive for base metal prices in dollar te terms. Within the base metals complex, copper, aluminum and nickel were top gainers on the LME (Chart 1) and while on the MCX too these were top performers, but the sequence of gains was however different with nickel prices in the Indian markets rising more than Aluminum (Chart 2).
Chart 1: LME Base Metals July Performance (% Chg)
2.0 1.5 1.0 0.5 0.0 (0.5) (0.6) (1.0) Copper Aluminum Nickel Lead Zinc
0 Copper Nickel Aluminum Zinc Lead
Chart 2: MCX Base Metals July Performance (% Chg)

4 3.7 3.5 3
1.8 1.6
0.8 0.6
2.5 2 1.5 1 0.5 0.7 0.4 0 1.6
Source: Reuters, Angel Research
Although an uptrend was seen in base metal prices last month, the risk to the downside remains on account of slowdown in manufacturing growth in emerging and developing economies, especially China. The HSBC Chinese Manufacturing PMI remains much below the 50 50-mark mark at around 47.7 and this th indicates contraction. On the back of this, imports of non non-ferrous ferrous metals within the Chinese markets can witness a decline in the coming months, thereby keeping a check on increase in prices of base metals metals. Chart 3 shows that in case of the emerging and developing economies (EDE), , it has been seen that manufacturing and services sectors are witnessing slowdown, whereas the same is rising in the advanced economies (AE). Economic slowdown is more apparent in the EDEs that contribute a larg large portion of base metals demand. Sentiments in case of base metals are likely to be bearish in the short shortterm with economic indicators from EDEs indicating slowdown.
Chart 3: Services and Manufacturing PMI in Emerging Economies falters, while rises in Advanced Economies
56.5 55.5 54.5 53.5 52.5 51.5 50.5 49.5 48.5 47.5 India China Brazil Russia Euro Zone Japan US ISM-Mfg US ISM Index Non-Mfg Index 48.4 49.5 49.6 48.7 50.5 50.7 56 55.4

Chart 4: LME Inventory Movement in July'13 (% Chg)

2.0 1.0 0.0 (1.0) (2.0) (3.0) (4.0) (5.0) (6.0) (7.0) (8.0) (9.0) (8.0) Copper Nickel Aluminum Zinc Lead (1.0) 0.4 1.0 1.0
The last month saw a sharp drawdown drawdo in LME copper inventories by 8 percent and this factor too supported upside in the red metal last month (Chart 4). While concerns over demand persist, the sharp decline in copper inventories suggests that demand is still on a strong footing. Demand in other copper-consuming consuming sectors in China may have seen a slowdown but expenditure in the power grid segment means that demand for the metal will remain strong from the worlds largest copper consumer. If copper inventories continue to decline then this factor could provide some respite to prices that are currently trading below the $7000/tonne mark.
Lead prices witness major Y-t-d d losses till end July13

Chart 5: Base Metals LME Y-t-d Y Price Performance (% Chg)
0 -2 -4 -6 -8 -10 -12 -14 -16 -18 -20 Copper Nickel Aluminum Zinc (19) Lead (13) (13) (11) (11)
Until the end of July13, year-to-date date price performance of base metals indicates that Lead has lost lo around 19 percent, (Chart 5) despite an overall decline in LME inventories by around 40 percent. Over the year, other metals have declined more than 10 percent and the macro fundamentals remain largely the same, while demand-supply supply factors in each of the metal differs. Specifically in case of Lead, data by the ILZSG (International Lead and Zinc Study Group) shows that during the first four months of the year, the refined lead market was in a small deficit, but year-on-year demand-supply supply figures show that the global lead market might witness a situation of slight oversupply in 2013 acted. Hence, despite falling inventories and strong demand seen in the Lead Acid Battery segment in the next two years, prices are witnessing itnessing downside pressure. Additionally, decline in economic growth forecasts for China this year is also creating a bout of worries as the country accounts for 45 percent of world lead demand.

Copper Gains almost 2 percent in July13

Chart 6: Copper LME Price vs. Inventory (Month-end (Month close)
710,000 660,000 610,000 560,000 510,000 460,000 410,000 360,000 Jan-13 Feb-13 Mar-13 Apr-13 13 May-13 Jun-13 Jul-13 8,300 8,100 7,900 7,700 7,500 7,300 7,100 6,900 6,700 6,500
Inventory (Tonnes)
LME ($/tonne)
Over the year, inventories of copper have witnessed sharp increases but in July13 copper inventories on LME declined almost 8 percent, and supported prices amid concerns over slowing Chinese economy (Chart 6). But prices have slumped considerably since the start of the year and when compared with inventories, a low stock scenario had kept prices elevated above $8000/tonne during Jan13. But the metal is facing pressure on the back of surplus seen in the first five months of the year and despite an 8 percent decline in inventories, inventories prices gained only around 2 percent. percent
Inventory % Chg 17.3 22.0 24.5 8.2 -1.1 8.4 -7.8
Copper Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13
LME ($/tonne) LME % Chg MCX (Rs/kg) MCX % Chg Inventory (Tonnes) 8,200 3.2 440.05 -0.8 376,000 7,816 -4.7 418.10 -5.0 458,775 7,533 -3.6 410.20 -1.9 571,125 7,037 -6.6 381.00 -7.1 618,175 7,276 3.4 413.05 8.4 611,125 -7.0 406.60 -1.6 662,275 6,765 6,886 1.8 421.55 3.7 610,725
Data by the WBMS (World Bureau of Metal Statistics) shows that between Jan Jan-May13 May13, the world copper market was is a surplus of 264,900 tonnes as compared to a shortfall of 278,900 tonnes seen in the same period last year. For the whole of 2012, a surplus of 70,900 tonnes was seen. World consumption during the Jan-May13 May13 period saw a decline to the tune of 1 percent at 8.517 million tonnes. World refined copper production during the same period saw an increase of 5.5 percent to 8.782 million tonnes as compared to last year. The surplus seen in the world copper market can said to be influenced by the fact that Chinese copper imports during the first half of the year slumped 30 percent. While the first-half half figures indicate negativity, imports of the red metal for the month of June13 witnessed a jump of 11 percent y-o-y y to 277,696 metric tonnes and hit a nine nine-month high. Hence, a wait and watch approach is necessary in order to evaluate how the demand scenario will pan out in case of copper over the year. The power grid sector in China has seen increased expenditure and this could support demand for the red metal. Hence, while the short-term trend is bearish, a bounce back in demand could be seen and this could help support prices in the coming months.

Copper SHFE inventories witnessed a sharp decline since April13 (Chart 7). Factors that contribut contributed to the fall in inventories include rise in spot buying due to demand from semi-fabricators fabricators and lower price levels, tight scrap market forced fabricators to increase ratio of usage of primary cathode to scrap scrap. Additionally, Chinese traders exported copper to Asian LME warehouses, mainly in Johor, Malaysia, due to favorable price differentials and incentives offered to store metal in these warehouses.
Chart 7: SHFE Copper Inventories (Tonnes)

270000 250000 230000 210000 190000 170000 150000 1/4/2013
2/4/2013 3/4/2013
4/4/2013
5/4/2013
6/4/2013
7/4/2013
Aluminum Prices rise despite rising inventories

Chart 8: Aluminum LME Price vs. Inventory (Month-end (Month close)
5,500,000 5,450,000 5,400,000 5,350,000 5,300,000 1,900 5,250,000 5,200,000 5,150,000 5,100,000 Jan-13 Feb-13 Mar-13 Apr-13 May-13 13 Jun-13 Jul-13 1,850 1,800 1,750 1,700 2,150 2,100 2,050 2,000 1,950
Although the price increase over the month of July13 was marginal, it was despite a phenomenal increase in LME inventories during the months onths of June13 and July13 (Chart 8). Inventories saw an increase amid disappointing demand growth and lower production output by major aluminum producers. The reason why prices increased despite rise in inventories was the expectations of cutback in Chinese aluminum production towards the end of the year. Additionally, global smelters that are facing losses due to fall in prices may also halt production in order to prevent further losses.
Inventory (Tonnes)
LME ($/tonne)
Prices have slipped from $2096/tonne in Jan13 to $1800/tone in July13. Between Jan-May13, Jan inventories remained at lower levels, but thereafter a sharp jump was seen. What contributed to the increase in prices was the weakness in the Dollar Index, which supported prices in dollar terms and the overall increase in other metal prices due to a slight stability in market sentiments.

Aluminum Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13
LME ($/tonne) LME % Chg MCX (Rs/kg) MCX % Chg Inventory (Tonnes) 2,096 1.4 110.6 -0.9 5,155,300 2,007 -4.3 105.45 -4.7 5,172,550 1,903 -5.2 103.65 -1.7 5,228,425 1,869 -1.8 100.15 -3.4 5,152,825 1,902 1.8 105.9 5.7 5,198,375 1,775 -6.7 105.05 -0.8 5,450,175 1,804 1.6 105.75 0.7 5,471,100
Inventory % Chg -1.1 0.3 1.1 -1.4 0.9 4.8 0.4
On a year-to-date date basis, inventories for aluminum have increased around 5 percent and prices during the same period have slipped more than 13 percent. Risk to the downside in demand remains considering the slowdown in European economies coupled with expectations of decline in Chinese consumption growth.
Chart 9: SHFE Aluminum Inventories (Tonnes)
530000 510000 490000 470000 450000 430000 410000 390000 370000 350000 330000 1/4/2013 2/4/2013 3/4/2013 4/4/2013 5/4/2013 6/4/2013 7/4/2013
Chart 9 shows that while hile LME inventories have increased, the SHFE scena scenario rio is opposite. In the months of March, April, June and July this year, SHFE aluminum inventories declined by 7.4 percent, 6.4 percent, 10 percent and 9 percent respectively. Expectations are doing rounds that the recently announced stimulus package by China along with the infrastructure plans that includes a high high-speed speed rail network and an affordable housing plan may have been the reason that led to a sharp drawdown in inventories. Weak demand growth is expected to lead to a closure of many smelters as the e correction in prices below $1900/tonne levels, , leading to world smelters operating at a loss on a cash cost basis. Even after the addition of premiums over and above the LME prices, producers have incurred losses as prices in July13 were trading below $1800. In the recent past, it has also been seen that premiums on Aluminum have declined as supply of the metal is expected to rise on the back of announcements by the LME to reduce queues at the warehouses. Although this is expected pected to begin in April 2014, markets have already begun factoring in this move. In case smelters move forward to halt aluminum production then aluminum prices could recover but due to weak demand-side side fundamentals, risk to the downside continues. According ing to data by the WBMS, apparent demand for aluminum in India increased 8.5 percent year year-onyear during the first four months of the year. Although this rate of growth in demand is not expected to

continue, annual aluminum demand growth in India is expect expected to be around 6 percent in 2013. Sectors that are witnessing strong demand growth are construction, packaging and commercial transportation sectors. But the Indian auto sector has witnessed a sharp decline production on the back of which demand for aluminum will be affected in this space. Demand for aluminum in China is expected to grow at 5 percent in 2013 as compared with 15 percent rise in 2012. When compared with the last year, consumption is signaling a slowdown and is in line with the decline in economic onomic growth of the base metals major China. A major factor that is seen to drive prices of aluminum in the later part of the year is the development that China is looking forward to slow down capacity in the al aluminum uminum market in 2013 and 2014. Growth in Chinese hinese aluminum output is expected to slow to 5 percent in 2013 and 2014 as against more than 12 percent in 2012. Efforts by the government to cut pollution have led to curb in the expansion of energyenergy intensive sectors, including Aluminum. In any case, a major part of Chinas aluminum sector is undergoing losses and costs of production are expected to increase due to the aggressive measures by the Chinese government to reduce energy consumption. Announcement by the Ministry of Industry and Information Tech Technology nology in April13 suggested that around 1 percent of total aluminum output in China would be closed by the end of 2013. If these plans are put into action and the government implements a higher energy price mechanism, then aluminum prices could receive up upside support.
Outlook
Base metals are expected to largely trade with a bearish bias on the back on ongoing macroeconomic worries that continue to threaten consumption growth. Worries over slowdown in emerging and developing economies are adding to fears that demand could be hit. Recent services and manufacturing indicators from the emerging market front indicate negativity. Focusing specifically on China, we feel that the countrys slowdown will impact base metals not only in the short-term rm but also from the long long-term perspective. Taking example of expected cutback in production of aluminum, we feel that such changes would be long long-term term in nature and thus would eventually cause a shift in the demand demand-supply patterns and fundamentals. In the short-term, term, Chinas economic indicators will be closely watched and base metals will take further cues from the same.
Technical Levels (1 Month)

Metals Copper Zinc Lead Nickel Aluminum Support 2 390 100 118 760 97 Support 1 408 107 123.5 800 102 CMP 428.9 112.6 129.2 847.5 108.15 Resistance 1 450 117 136 890 112 Resistance 2 465 124 145 940 118

Base Metals Monthly Report, 7th August 13

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Base Metals Monthly Report, 7th August 13

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Base Metals Monthly Report

Wednesday| August 7, 2013

Angel Commodities Broking Pvt. Ltd.