Spotlight. Base metals bend before trade tensions

The palpable risk that the escalating trade tensions between the US and China may turn into a full-blown trade war (and possibly draw in other countries as well) is already beginning to take a toll on the global commodity markets, and base metals are no exception.

The LME (London Metal Exchange) base metals index has fallen to multi-week lows as speculators are exiting . The recent rate hike by the US Federal Reserve and firming of the dollar are seen pressuring the market further down, while softer Chinese data have been unhelpful.

Slowdown in China

Without doubt, China is the mover and shaker of the global base metals market, and any friction involving the Asian major sends out negative signals. Even otherwise, price of industrial metals would fall this year owing to slower growth in China. The Chinese economy is losing momentum, and demand is expected to be more subdued.

Importantly, there are clear signs of a sharp slowdown in the pace of China’s credit growth, driven by deleveraging of non-bank lending. Also, public fixed asset investment in infrastructure has slowed. Environmental pollution issues continue to engage policy attention. All taken together, it stands to reason to anticipate slower metal demand growth in the second half of the year.

Aluminium was trading below $ 2,200 a tonne last week with the distinct possibility of the prices hitting $2,100, a level at which it was trading before the sanctions on Russian producer Rusal in early April. Whether Russian production has been hit because of the sanctions is unclear at this point in time, but if the sanctions are lifted — for whatever reason — the metal is likely to come under increased selling pressure.

Copper had made significant gains since last month on fears of supply disruption in the wake of upcoming wage negotiations in some of the large mines. While prices are expected to remain volatile until the wage negotiations are completed in July and August, the change of sentiment is caused by escalating trade tensions. From well over 7,200 a tonne earlier this month, copper has already shed over $300 a tonne, losing all the gains it had made since the beginning of this month.

Even otherwise, the copper rally was unlikely to have lasted long because the supply situation is a lot more comfortable this year vis-à-vis 2017, while the demand side looks lacklustre as evidenced by the surge in exchange stocks of the metal since the beginning of the year. Importantly, the price increase was, in some sense, triggered by speculative capital, which, by nature, is fickle. Now, with the change in sentiment, prices are falling back.

Watch out

The metal to watch in the next two quarters will be nickel. For 2018, the refined market will be in deficit, anywhere between 50,000 tonnes and 90,000 tonnes. Even at the lower end, it is the largest projected deficit as a share of consumption. Nickel’s fundamentals are clearly tightening, and annual deficit is likely to get larger in the next 2-3 years.

The Electric Vehicle (EV) revolution is widely believed to add an element of bullishness; but at the moment, EV is more of a medium-term story. The technological shift is likely to take time . Nickel is, therefore, still essentially a stainless steel story, and weaker demand may well prove to be a strong headwind.

On the other hand, the global zinc market fundamentals are turning increasingly balanced as supplies improve. Indeed, it is widely believed that in H12018, the market is clearly in surplus. This is reflected in prices. Zinc recently dropped below the psychologically important $3,000-a-tonne mark, hitting a multi-month low.

Primarily used in the galvanising of steel, zinc is another victim of the gloomy sentiment due to the escalating trade dispute. In the current environment, prices could fall further, benefiting consumers.

The writer is a global agribusiness and commodities market specialist.

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