IGI Logo

"Base Metal Outlook Report" by Mr. Saish Sandeep Sawant Dessai, Research Associate- Base Metals, Angel One Ltd

Following a double-digit decline in the base metals pack, the metals extended their weakness from the previous month, with most of the metals ending in the negative zone. Copper and Aluminum, on the other hand, managed to avoid weakening and conclude on a high note.

Furthermore, the recent increase in Copper and Aluminium prices has resulted in positive YTD returns for both metals. Zinc, Nickel, and Lead, on the other hand, continue to underperform, falling 5.4, 22.3, and 6.7 percent, respectively. 

Zinc falls amid an uncertain global economic outlook

Metal prices rose early in the month as favourable stats from China, the world's largest consumer of metals, revealed that factory activity surged at the fastest rate in more than ten years in February. Another factor that boosted metal prices was the weakening of the US dollar, which made dollar-priced commodities more affordable to buyers using other currencies.

However, the better demand sentiment in China was offset by hawkish comments from the US Federal Reserve Chair, who stated that the central bank is likely to raise interest rates more than previously anticipated in order to manage inflation.

The dollar also rose to a three-month high as a result of these comments, capping the gains made by the metal used for galvanizing steel.

Remarks made by Federal Reserve Chairman Jerome Powell regarding upcoming rate hikes aimed to battle persistently rising inflation have increased worries about the state of the economy and the demand for industrial metals on a global scale.

A surprising bank crisis

On Friday, March 10, the United States witnessed its second-greatest bank failure in history and the largest since the 2007-2008 financial crisis. After a bank run, Silicon Valley Bank (SVB) failed. It was one of three bank collapses in the United States in March 2023. The collapse of SVB had far-reaching ramifications for the global economy and asset classes.  

Only a week after the US took the required actions to ensure the security of the US banking system, another bank was on the cusp of failure. Credit Suisse, one of Switzerland's leading financial institutions, became embroiled in the ongoing banking crisis, which further had a significant influence on worldwide markets.

Concerns over the banking crisis contributed to the sharp drop in metal prices, overshadowing optimism in China, where economic activity increased in the first two months of 2023 but failed to push up metal prices.

Steps were taken sooner rather than later to bring an end to the crisis, and zinc prices saw some respite as regulators worked to save these banks. A sizable group of banks were injecting capital into the troubled US banks. The failing Silicon Valley Bank (SVB) was sold to a regional US counterpart, while the troubled Credit Suisse was acquired by UBS Group. Further aid came on the back of anticipation that the US Fed would likely pause the interest rate hikes and the US Dollar index hovering near 9-month lows.

Outlook:

Given the rebound in Chinese demand and the expectation that the US Federal Reserve will probably suspend its rate hike plans, zinc is expected to trade higher in the near future. China's PMI data for the month of March declined after showing a rise in the first two months of 2023, sending conflicting signals regarding growth, although the reading is still higher than the threshold of 50. The commodity priced in dollars would also become more accessible to holders of other currencies if the dollar index kept falling.  As these headwinds ease, however, there are growing expectations that the market could tighten, adding that this may be exacerbated by the low level of inventories.

We expect MCX Zinc prices to trade higher towards Rs.285 per kg. (CMP: Rs 248.60)

Above views are of the author and not of the website kindly read disclaimer