Base Metals Out of Woods Poised for an Overnight Spike or Risk of Another Sell-off Remains?

  • Mar 27, 2020 AEDT
  • Team Kalkine
Base Metals Out of Woods Poised for an Overnight Spike or Risk of Another Sell-off Remains?

Base metals such as copper, nickel are finally taking a breather post a significant drop in the wake of COVID-19 outbreak and its impact on global economic activities. However, now the global leaders are coming together to deal with the effect of the virus outbreak, which, in turn, is shaping the market in unprecedented ways.

Gold is reacting sharply to the change in policies, and money taps opened by the United States Federal Reserve and the Trump administration and have been able to hold on to the strong support at USD 1,500 per ounce post the recent rebound.

To Know More, Do Read: Massive Move on Gold; USD 2 Trillion Stimulus Bill The Game Changer?

While gold prices are responding positively in the wake of liquidity gush, it seems like base metals are also cherishing the same along with savouring over the cash injection into the economy by the United States Federal Reserve in terms of easy lending and credit availability for households and businesses.

To Know More, Do Read: Is FED Running Out of Bullets in Bringing Down The COVID-19 Impact? Oil Market Yet Under Duress

However, apart from quantitative easing led by the Federal Reserve, the commodity market, especially base metal, is witnessing some fundamental shift in the demand and supply dynamics. The market currently speculates that while the probability of demand restoration in China is improving as activities across few sectors such as manufacturing and construction is slightly picking up; the supply could eventually go in peril for over a short-term.

Major base metals producing countries such as Chile, Peru, Indonesia, Australia, South Africa, and many others are taking stringent actions such as locking down on various mining activities while exempting only a few that come under the essentials category, which is further prompting many mining companies to put their facilities on care and maintenance for a while.

To Know More, Do Read: Resource Stocks Apply Brakes on Operations to Comply with Local Authorities’ COVID-19 Actions- SYR, JMS, CSD, and AZS

Apart from the halt in mining companies operations across different geographies, the slowdown across the transportation industry amid cross broader restriction imposed by various Federal and State Governments is contributing considerably towards the weak supply chain, the impact of which could be seen in the recent price action of commodities such as iron ore.

To Know More, Do Read: Iron ore Prices Beating Market Headwinds as Supply Chain Gets Derailed Thanks to Virus

Likewise, other commodities such as copper are now shaping a similar demand and supply dynamics, where the probability of improvement in Chinese demand is high, and chances of an oblique supply chain are somewhat definitive.

The same could be inferred from the recent drop in copper concentrate treatment charges across China in the wake of emerging fears related to the supply disruption. The Shanghai Metals Market copper concentrate index, which tracks the treatment charges of imported copper concentrate spot trades fell by USD 3.12 per metric tonne to stand at USD 68.35 per metric tonne (as on 20 March 2020) against its previous week peak price of USD 71.47 per metric tonne.

In South America, the Government declared a state of emergency, and in tandem, many miners had scaled backed the production, causing concerns about a potential delay in shipments scheduled for April 2020.

Miners Halting and Easing Operations

Codelco- the Chilean copper mammoth reported yesterday that the Company is temporarily suspending construction of some its project and reducing workforce allocation to ensure operational continuity for a period of 15 days.

MMG-the behemoth Chinese miner recently informed that it would reduce the operations at Las Bambas, which is one of largest copper mine across the globe in Peru. Anglo American one of the major copper miner also notified the shareholders that it would scale down operations at the Los Bronces copper mine in Chile.

In Chile, Teck Resources also suggested that it would temporarily suspend the construction of Quebrada Blanca Phase 2 copper project, while Freeport-McMoRan mentioned that it would put Cerro Verde copper mine in Peru under care and maintenance for 15 days, in the wake of measures adopted by the Peruvian Government.

Rio Tinto Limited (ASX:RIO)- one of the world’s largest copper miner suggested that it would low down some of its operations in the wake of actions taken by the Premier of Quebec in Canada and President of South Africa.

In another release, previously Rio stated that the Company would comply with the Government of Mongolia to ensure Oyu Tolgoi is operating in accordance with the restrictions put forward by the authorities.

Rio also mentioned that, since January 2020, the movement of goods and people within Mongolia had been restricted within and across its border; thus, the Underground project would move slow, and the miner is yet to fathom out the complete impact `of the slowdown.

Likewise, many larger miners such as Vale, Pan American Silver, BHP Limited (ASX:BHP) have either suspended or reduced their operations, which in turn, could shift the demand and supply dynamics toward lower supply over the short-run.

However, investors should also consider the deflationary impact on the dollar, which over the long-term could hamper the base metals prices as most of the base metals are denominated in dollar.

In the past few trading sessions, copper futures on COMEX has recovered from its recent low of USD 2.059/lb (intraday low on 19 March 2020) to the present high of USD 2.211/lb (as on 25 March 2020), denoting a price appreciation of~ 7.38 per cent.

During the day’s session on 26 March 2020 (5:56 PM AEDT) so far, base metals are trading under pressure, which might be coming from the impact on the dollar, which is so far under pressure as the stimulus package of USD 2 trillion is moving forward within the Senate.

Apart from that, the ongoing bullish moves in the equity market across the globe holds the potential of a b off effect on base metals, while supply could remain oblique over the very short-run, which could cause the base metals prices to show some spike overnight post the senate meeting.

The recovery in Dow Jones index is depicting another supportive picture for base metals, with the index rising from 18,213.65 (intraday low on 23 March 2020) to the present high of 22,019.93 (as on 25 March 2020), reflecting a gain of ~ 20.89 per cent.

However, before pulling any trigger across the commodity market, investors should consider the risk of a fresh round of sell-off, which many industry experts anticipate would remain high, till the time the USD 2 trillion stimulus package actually reach the market from papers, which is yet pending for a vote, lined up on 26 March 2020.

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