Breaking News

Will The Rally In Base Metals Continue Or Fizzle Out?

By Riken MehtaCommoditiesOct 12, 2017 15:37
Will The Rally In Base Metals Continue Or Fizzle Out?
By Riken Mehta   |  Oct 12, 2017 15:37
Saved. See Saved Items.
This article has already been saved in your Saved Items

A rally in base metals has been the talk of the town in what has been a relatively dismal year for the broader commodity market in 2017. Non ferrous metals pack (an alloy which does not contain iron) comprising copper, zinc, aluminium, lead and nickel have surged to multi-year highs in the second half of 2017. Tin, a part of the same pack has refrained from joining the bull run of its peers . Ferrous metals pack consisting of iron and steel have also minted money for commodity traders and investors in 2017. So what's driving the rally?

China's Environmental Campaign

China's drive to control air pollution and smog has led to persistent cuts in capacities of heavy industries. The shutdowns are part of President Xi Jinping’s plan to cut excess capacity and clean up the environment after years of rapid expansion that has made China one of the most polluted countries in the world.

The move to cut production is immense considering China's mammoth dominance in the commodities market. China's production of coal and steel is equivalent to the combined production of rest of the world. Similarly, the country produce more aluminium and cement. Global companies, especially European and American players, had in the past complained about China dumping their markets with cheap metals. However, with the recent cuts by China, these companies are now pocketing more gains due to run-up in commodity prices.

China has set ambitious goals for production cuts. It aims to trim down its aluminium production capacity by 30%, cut coal production by 25% of its 2016 output (800 million tonnes), and trim steel capacity by 20% of 2016’s production (100 to 150 million tonnes ). The country wants to get rid of steel capacity equal to 15 times that of Britain by 2020.

China's GDP, Weak US dollar

On the growth front, China's GDP numbers surpassed analysts’ expectation as the economy grew 6.9% during the first half of 2017 compared to the government's target of 6.5%, and last year’s growth rate of 6.7% percent.

Apart from China's stellar growth and prospects of relatively low supply, weakness in dollar index too has been a catalyst for the metal rally. Dollar index, which has an inverse relationship with commodities, has lost 9% this year boosting metal prices further.

Bearishness in US dollar has been primarily for 2 reasons. Optimism in the US has been fading post US President Donald Trump coming to power as he has failed to pass any significant legislation to support his earlier promised big bang business reforms . Simultaneously, a revival in European and Asian GDP growth have led to fall in the US dollar.

A weak dollar boosted base metals rally, as costs in local currencies spiked and many quantitative funds grabbed the opportunity to trade the correlation between the two.

Factors to watch - China's new politburo

China's President Xi Jinping will unveil his new leadership team on October 18 for his second term. The country's biggest political reshuffle event , held once every five years, is critical for Xi Jinping who will look to consolidate more power at the centre.

China's ambitious environmental plan and its success will have substantial dependence on this event as it will set the stage for the central government to push its environmental agenda against the local government, since smelting and mining industries provide thousands of jobs to Chinese people.

Underlying demand for commodities

There have been some signs of commodity demand returning in China , given its current infrastructure boom, however, data suggest it isn’t strong enough to sustain the rally in base metals.

Global copper demand has remained flat for 18 months at 23 million metric tonnes, on a trailing 12-month basis; year-on-year it has surged only twice in March and May (as per Bloomberg data). Demand for zinc has gone sideways and is hovering at 14 million metric tonnes while for nickel the trend has already started to decline.

The current rally is mainly supported by the supply cuts and plant strikes. Higher commodity prices will lure metal producers to increase supply to take advantage of current rally. Further, there has been speculation since beginning of the year as to what quantum of supply cuts will actually affect production. Many Chinese companies have chalked out plans to substitute old polluting industrial plants with newer, efficient and cleaner ones in the western part of China.

Analysts are of the view that traders and investors should focus on aluminium and monitor whether China implements capacity closures in accordance with its announcement. Supply demand deficit needs to continue in zinc, however, for copper and nickel, one should look for further supply-side disruptions or closures to prolong rally in respective metals.

A sustainable rally for commodities in the longer run can only be driven by demand growth rather than supply cuts, and so far strong demand is lacking in this rally.

Will The Rally In Base Metals Continue Or Fizzle Out?

Related Articles

Will The Rally In Base Metals Continue Or Fizzle Out?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email