Since the first week of June, base metals have met with considerable weakness as the trade war between the US and other global economies escalated. With the uncertainty continuing, further correction is expected in the base metal counter.
The first and second week of June saw trade war erupting between the US and the European countries, Canada and Mexico. With the standoff with China continuing, the US protectionist policies have brought the world to the brink of a global trade war.
In the first week of June, the US announced plans to move ahead with tariffs on aluminum and steel imports from Canada, Mexico and European Union. The US, which was already waging a trade war with China, had earlier exempted Canada and Mexico.
In retaliation, European Union slapped revenge tariffs on the US products including bourbon, jeans and motorcycles. Horticulture products, clothing and steel also were in the target list.
Meanwhile, the US also came out with a fresh list of products imported from China worth $200 billion, which would be subjected to increased tariffs. The second round of trade-fight was triggered after China retaliated with increased tariffs on a set of products bought from the US.
The G-7 summit at Quebec and the war or words between the country heads saw base metals losing most of the gains they had made in the past few months.
In the past two weeks, zinc prices fell 8 per cent in the London Metal Exchange as well as Multi Commodity Exchange. Copper was down 7 per cent, aluminum 5.3 per cent, lead 3 per cent and nickel by 1 per cent.
“More than the supply disruption of commodities due to the global trade war, the market was concerned about global growth. Shrinkage in global growth will affect the demand for all products, including commodities,” said Kaynat Chainwala, research analyst (base metals), Angel Commodities Broking.
Among the base metals, nickel was hit the least as strong fundamentals have been keeping the metal positive. Both supply and demand are in favour of the metal. Increased demand for steel and rising steel prices has led to buoyant demand for nickel. Further, the demand for nickel from the electric car segment is also strong. On the other hand, nickel supply has been going through a deficit. Nickel stocks at the LME warehouses as well as the Shanghai Futures Exchange warehouses have recorded a shortage compared with last year.
However, negative sentiments on the global trade front limited the upside of the metal in the past two weeks. Despite the recent weakness, nickel prices are up by around 20 per cent from January levels as higher steel tariffs imposed by the US and the sanctions imposed by the country on Russian individuals and companies had hit nickel supply.
Apart from the trade war, the movement of the US dollar has not been favourable for commodities in general and base metals in particular. The US Federal Reserve had taken a hawkish stand during the last federal open market committee (FOMC) meeting and went ahead with the rate hike. The market now expects at least two more hikes this year and this has lent support to the dollar. The strength in the dollar in the past two weeks has led to considerable weakness in commodities.
Chinese demand, which is an important factor determining the price of base metals, too was muted. The latest data from China on retail sales, fixed asset investment growth, credit issuance, housing sales and most importantly industrial production came out much weaker than what the market had expected. Even though, direct impact of trade war has not started reflecting on the economy, slowing demand in different spheres of Chinese activity was visible as per the latest data.
Going ahead, market watchers expect base metals to trade with a negative bias at least for a month. “The trade war fears are only escalating and the dollar remains strong. Further, June and July are months of slower demand. While we will see base metals undergoing further correction, only nickel is expected to remain marginally positive due to the strength of its fundamentals,” said Chainwala.