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Below are Views On A gloomy outlook for industrial metals By Mr. Yash Sawant, Research Associate, Angel Broking Ltd

A gloomy outlook for industrial metals

The bullish spree in the Base metal’s spectrum has supposedly hit pause in the month gone by. The Industrial metals complex has outperformed most asset classes since 2020 as increasing liquidity and soaring infrastructural expenditure around the globe in an attempt to counter the pandemic led slowdown propped up the base metal prices.

Governments around the globe voicing the need to curb carbon emissions and the noteworthy expansion in the Electric Vehicle segment further strengthened the outlook for the entire pack.

In May’21, commodity prices soared to record high levels across borders following optimism over reopening of economies and promising demand prospects in the times ahead. Also, major metal producing nations taking longer than expected to resume operations post the pandemic led curbs sent the Base metal prices higher.

However, the recent spike in commodity prices hampered China’s manufacturing sector margins and triggered worries of potential commodity led inflation. China’s Producer Price Index rose to 12 year high in May’21 after which officials pledged to strengthen its management of commodity supply and demand to curb "unreasonable" increases in prices.

Chinese regulators announcing to increase scrutiny over the commodity market and rule out irregularities and malicious speculation undermined the industrial metals. Along with increased supervision, China also planned sale of its state reserves of nonferrous metals Copper, Aluminium and Zinc directly to the downstream users via public auctions in an attempt to curb the soaring commodity prices.

FED hints a hawkish stance

Along with China’s rigorous attempts to ease commodity prices in order to avoid potential inflation, prospects of tapering the expansionary policy by US central added to the woes.

The recent US Federal Reserve policy meet indicated towards a potential shift in the monetary stance following the steady recovery in the world’s largest economy. Bets on the US Central bank clamping down its expansionary approach clouded the outlook for growth related assets like the industrial metals.

Also, prospects of a sooner than expected rate hike by the US FED gave strength to the US Currency which further weakened demand for the Dollar priced Base metals.

Stalling China’s Steel demand

LME Zinc prices gained about 10 percent in the first five months of 2021 as bets on speedy economic recovery and plummeting Treatment charges kept the prices elevated.

However, LME Zinc prices plunged about 8 percent in the first three weeks on June’21. Besides China’s attempts to curb commodity prices and expectations of a hawkish stance by the US FED, the galvanizing metal was further hampered as a seasonal downtrend in China’s construction sector dented appeal for steel.

China’s construction and infrastructural activities tend to slowdown during the rainy season. Even the buildup of rebar inventories at China’s steel mills and warehouses indicated towards stalling demand in the world’s largest steel consumer and producer which undermined Zinc and other key ingredients used in steel productions.

After climbing to record high levels in Mid-May’21, China’s steel prices plunged in the past few weeks following China’s attempts to curb the commodity prices. However, demand for steel might continue to remain elevated with increase in the number of economies reopening.

Outlook

Prospects of a shift from the expansionary approach by the US Central banks and China’s attempts to ease commodity is expected to be a major setback of the industrial metal’s spectrum. China has announced to sell metals from its national reserves to nonferrous processing and manufacturing firms through a public auction. China’s state reserve stated that it would auction 20,000 tonnes of their copper reserves, 30,000 tonnes of zinc reserves and 50,000 tonnes of aluminium reserves in the first week of July’21.

We expect Zinc prices to trade lower towards Rs.220 per kg on the MCX in a months’ time. (CMP : Rs.234)

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