Base metals to trade weaker
The US plan to impose import tariffs on steel, aluminum may trigger a trade war

Base metals were trading weak last week as the macro economic developments from key markets were not in favour of commodities. With the Donald Trump administration in the US proposing to impose higher tariffs on steel and aluminum imports, market expects further weakness in base metals this week or fortnight.

Most of the base metals, except aluminum, fell last week as the US dollar rose five-week high on prospects of a tighter monetary policy. The new US Federal Reserve chief Jerome Powell had indicated that he will maintain a more hawkish stand compared to his predecessor. The dollar index also moved up as euro weakened on euro zone inflation hitting a 14-month low.

Commodities, including precious metals, crude oil and base metals, were down last week on the strength of the dollar. Among base metals, zinc fell 4 per cent and nickel 2.3 per cent in the London Metal Exchange. Aluminum was the only metal that was marginally up last week. Aluminum prices gained from reports about lockout of union workers at an Alcoa smelter in Quebec, which has cut its operation by about two-thirds.

Apart from the US dollar, the mixed economic data coming from China too did not support base metals much. Earlier in the weak, the import data provided some strength to base metals. This was before Powell’s remarks on the US monetary policy came in.

“Base metals were basking under the glory of robust January import nu­mbers from China. Data from China’s general administration of customs (GAC) showed that copper imports rose 13 per cent to 314,525 tonnes, while refined zinc imports surged by 287 per cent to 67,111 tonnes and refined nickel imports doubled to 26,691 tonnes in January 2018,” said Kaynat Chainwala, research analyst (base metals), Angel Commodities Broking.

Further, China’s top steel-making city of Tangshan proposed to extend restrictions on production between March 16 and November 14, 2018 once the current curbs expire in March in order to improve air quality. Major mills including Tangsteel Company and privately-owned Tangshan Guofeng Iron and Steel could cut production by as much as 15 per cent while other producers could curb production by 10 per cent.

However, optimism in the market was short-lived as China’s purchase managers index (PMI), indicating the health of manufacturing sector, fell to a two-year low. Along with the strength in the dollar, this was enough to pull down the base metal prices.

By the end of last week, the Trump administration in the US announced plans to impose higher tariffs on steel and aluminum imports to safeguard the domestic manufacturing sector. The plan is to impose 25 per cent tariff on steel and 10 per cent on aluminum imports and this will be formally announced this week.

The US steel and aluminum producers were worried about increasing dumping by countries like China. Instead of higher tariffs on imports from dumping countries, the Trump administration chose to impose a blanket levy of tariffs. The move can potentially trigger a “trade war” between countries. While, European Union and countries like China and Canada are likely to oppose this move and retaliate, the downstream sectors in the US are also worried about the availability of metals.

“There is currently an uncertainty in the market. Aluminum prices have gained on this uncertainty. Two possible scenarios are likely to emerge in the current situation. Due to pressure from global powers, the US may ease the curbs. If the US sticks firm to its stand, other nations may retaliate with trade-related measures. In both scenarios, base metal prices may suffer,’ said Chainwala.

If the trade-related tensions ease, aluminum prices may see correction in the absence of uncertainty. If the tariffs are imposed as proposed by the US administration, this can create surplus of metals like aluminum, zinc and nickel in the global market, which too is not favourable for the base metal counter.

Copper in the LME was trading at $6,898 per tonne by the end of last week. Aluminum was at $2,149 per tonne, lead $2,448 per tonne, nickel $13,450 per tonne and zinc $3,355 per tonne. Coming sessions may see prices falling from these levels.