Caution: Further stock rallies not expected

The base metal complex that was on a winning run till last week seems to be exhausted and prices are currently going through a corrective phase. In the international market aluminium, copper and zinc are the top gainers followed by nickel and lead. Since the start of 2017, aluminium, copper and zinc prices in the London Metal Exchange gained more than 20 per cent, while nickel and lead gained 17.3 per cent and 12.3 per cent respectively. LME aluminium is now trading near four-and-a-half year highs while copper is at its highest level since September 2014. Hope of slow but steady Chinese and global manufacturing growth, along with a weak dollar have supported prices. In the domestic futures market, prices rallied in line with international counterparts, but gains were limited due to a strong rupee.

Latest import data from the world’s top metal consumer, China, showed a stronger than expected growth in August which reinforced hopes of a healthy pace of a growing economy despite tighter policy. As per the data, imports of metals have grown 13.3 per cent in August against a forecast of 10 per cent which suggests higher than expected domestic demand. Meanwhile, export growth has softened since shipments fells in February.

Dollar index

A weak US dollar supported prices as well. The Dollar Index, which measures value of the US dollar against a basket of foreign currencies, slipped more than 12 per cent this year. A strong US currency makes dollar denominated commodities expensive for holders of other currencies. At the same time, the Indian rupee has gained about 7 percent during this period.

Declining inventories in the LME warehouse is the other reason that supported an uptrend. LME stocks of many base metals are currently placed at multi-year low levels.

Looking ahead, further sharp rallies are least expected due to lack of strong fundamentals. Reports indicate that the mine production is recovering from disruptions earlier this year with many of them reporting growth in output, which may increase the supply later.