Rising oil prices and a drop in Chinese demand depress prices of base metals
Sharad Matade 10 March 2011

Prices of base metals—especially copper—were going up due to investment demand. In this quarter, buyers were restocking inventories, the market seems adequately supplied, and high prices are leading to a slowdown in Chinese demand

Prices of base metals, particularly copper, have started falling on concerns of slow demand in China and rising crude oil prices-that could hurt global economic growth.

Yesterday, copper for three-months delivery on the London Metal Exchange (LME) closed at $9,275 per tonne, from a close of $9,530 per tonne on Tuesday. On 9th March, the inventory level of copper on the LME stood at 425,725 tonnes, which is the highest level since July 2010.

Copper prices had touched a record level of $10,190 per tonne on 15th February on the back of high demand and large deficit of the metal in international markets.

However, investors' confidence has been shaken after crude oil prices started soaring due to political unrest in oil-producing countries, which could slow down economic growth and curb demand for base metals. On top of this, the Organization of Petroleum Exporting Countries (OPEC) has also added fuel to the fire, saying that there is "no need" to hold an emergency meeting to increase oil production.  

Higher prices and sufficient domestic supply of copper in China, the world largest copper consumer, has led to cooling down of prices in international markets.

"Prices of copper were mainly rising because of investment demand. In this quarter, we have seen that buyers were engaged in restocking their inventories amid huge deficit. Now there are enough supplies in the country's market at a time when prices are very high and that has led to slow demand in China," an analyst from a Mumbai-based research firm told Moneylife, preferring anonymity.

"But we have to wait and watch for a while to check whether there are fundamental changes or just a reaction on geopolitical issues," added the analyst.

According to JP Morgan Securities, copper deficit would be between 500,000 tonnes and 600,000 tonnes in 2011.

"Now there are some reports that China would not enjoy robust growth, and rising prices of crude oil has also caused prices to come down," added the analyst. "But I don't think that prices of copper will come down the below $7,500 per tonne level."

According to a report which appeared today, China's trade balance has slipped into a $7.3 billion deficit in February, its largest in seven years, as exports and imports plunged.

According to the General Administration of Customs of China, imports of copper and allied products came down by around 35% to 235,469 metric tonnes from 364,240 metric tonnes in January.

"The fall in copper imports does not indicate that demand has been affected drastically. It happened four months back, before this copper rally. Until any trend continues for two to three months, it is difficult to jump to any conclusion," added the analyst.

Zinc, used to make steel rust-resistant, has also plunged by 6% to $2,240 per tonne, which is a session lowest, yesterday, due to higher inventories and rising fuel prices. Aluminium traded at $2,598 per tonne from $2,596 per tonne on Tuesday.

"It's a basic trend that aluminium and zinc follow copper's footstep. Prices of aluminium and zinc were going up because copper prices soared in the international market. But copper has strong fundamentals as it is on high demand amid huge deficit. However, aluminium and zinc are in surplus," said the analyst.

"If there is any kind of fundamental correction, then zinc and aluminium would be the worst victims," added the analyst.

The Chinese government is expected to increase interest rates to curb inflation and that could impact demand for base metals. However, experts believe that it would not have much impact.

"The country has already increased interest rates four to five times in the last four months, but we have not seen much impact of the same on the demand or production side. However, if the government takes strict steps, then aluminium and zinc may see a large fall in prices," said the analyst.

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