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Informist, Thursday, Dec. 26, 2024

 

By Ashutosh Pati

 

MUMBAI – Base metals started this year on a strong footing, but the rally in prices has faded in the last few months. The subdued sentiment is expected to continue in the first few months of the new year due to sluggish demand from China and potential trade tensions with the US. However, supply constraints and increasing raw material costs could lift prices towards the second half of 2025, market observers said.

 

Globally, trade tensions are palpable since US president-elect Donald Trump threatened to impose additional 10% tariff on imports from China and 25% on imports from Mexico and Canada.

 

"The potential for an escalation in trade tensions is a downside risk, while markets are waiting to see if and when Chinese support measures feed their way into commodity markets in the form of stronger demand," Ewa Manthey, commodities strategist at ING Economics, said in a report.

 

China has announced a slew of stimulus measures since late September, which resulted in a rally in metals. However, the rally quickly faded due to lack of additional fiscal support from the country. Next year, China plans to issue special treasury bonds worth 3 trillion yuan ($411 billion) to support economic growth, Reuters reported on Tuesday. The plan for sovereign debt issuance in 2025 indicates a sharp increase from this year's 1 trillion yuan and comes amid efforts by Beijing to soften the blow from an expected increase in US tariffs on Chinese imports when Trump assumes office in January, according to the report. If these measures work in favour of China, they will support economic growth and boost metal prices. 

 

This year, zinc led the way among base metals, gaining around 20% on the domestic bourse since the beginning of the year. Aluminium and copper followed at 14% and 10% gains, respectively. In 2025, experts see aluminium outperforming other metals due to rising alumina prices and lower production, which is likely to push the aluminium market into a deficit.

 

ALUMINIUM

Commerzbank AG expects aluminium prices on the London Metal Exchange to hit $2,800 per tonne in the second half of 2025, mainly because of a slowdown in growth in China's production.

 

The sharp rise in prices of alumina, the raw material required for production of aluminium, has increased production costs and reduced the margins of aluminium producers. "Even if the supply situation for alumina eases over the course of next year, thanks to a recovery in production in Australia, growth in aluminium production in China is likely to slow down significantly as it approaches the government-imposed capacity limit of 45 million tonnes," Barbara Lambrecht, commodity analyst at Commerzbank AG, said in a report. Australia is the second-largest producer of alumina in the world, accounting for around 15% of global production from its six alumina refineries.

 

China's National Reform Commission plans to reduce emissions in the aluminium industry. New coal-fired smelters will no longer be approved and no new aluminium smelting capacity is to be built in regions with stricter emission controls, Lambrecht said.

Latest data from the International Aluminium Institute show that globally, production of primary aluminium fell 3.1% on month to 6.04 million tonnes in November. Production in China fell by 121,000 tonnes to 3.61 million tonnes last month. The country accounts for nearly 60% of global production of the metal.

 

"Europe's aluminium sector was one of the worst affected industries during the energy crisis, with more than 1 million tonnes per annum taken offline. We don't expect any new restarts to be announced soon in Europe or the US amid high alumina prices and demand recovery still uncertain, particularly in Europe," Manthey said. Global energy markets tightened in 2021 as the COVID-19 pandemic led to a rapid drop in energy demand. The situation escalated after Russia's invasion of Ukraine in February 2022 and prices of oil and natural gas hit record highs.

 

PMI readings in the Eurozone show contraction, indicating weakness in the construction and transport sectors. Moreover, the transition to electric vehicles has also slowed down in the region due to cutbacks and delay in battery and electric vehicle projects. Manthey now expects the global aluminium market to be in a deficit of around 400,000 tonnes next year, after a surplus of around 100,000 tonnes in 2024.

 

Ajay Kedia, director at Kedia Advisory, expects aluminium prices to hit INR 300 per kg on the Multi Commodity Exchange of India in 2025, with resistance at INR 318 per kg. At the time of writing this report, the most-active January aluminium contract on MCX was at INR 240.25 per kg.

 

COPPER

Towards the end of September, copper prices on LME touched $10,000 per tonne after China announced stimulus measures. The crisis in the country's property sector has weighed on prices of copper and other industrial metals, as this accounts for a major chunk of the global demand for these metals. However, a potential US-China trade war has led to hope of Beijing unveiling more aggressive stimulus measures.

 

Additionally, as China's recent stimulus has focussed on clearing property inventories rather than boosting new starts, copper and aluminium are likely to have an advantage, as both these metals are heavily used in the completion stage of construction when copper wirings and aluminium framings are added, Manthey said.

 

Coming to the supply side, global surplus of the red metal widened to 287,000 tonnes in Jan-Oct from 9,000 tonnes in the corresponding period last year. Global production of refined copper rose 3.7% on year to 22.77 million tonnes in Jan-Oct, while consumption was up 2.5% at 22.48 million tonnes, according to the International Copper Study Group.

 

Copper production in the Democratic Republic of Congo, the second-largest producer of the metal globally, is expected to continue rising with the expansion of the KamoaKakula mine, the country's largest copper project.

 

The surplus in the copper market is expected to continue in 2025 as well. Analysts at ING Economics expect a surplus of around 200,000 tonnes next year as a rise in refined copper production could be capped by constraints in the availability of concentrates.

 

"Copper smelters in China have continued to expand capacity despite low profits, heading for another output record this year. Most capacity is state-owned, requiring it to meet growth targets set by local governments despite low processing fees," Manthey said.

 

China's copper imports in November stood at a one-year high of 528,000 tonnes. Along with that, copper inventories in warehouses monitored by the Shanghai Futures Exchange fell 29% to a nine-month low of 108,775 tonnes last month.

 

"A combination of lower domestic stockpiles and mixed import trends highlights tightening supply conditions in China's domestic market," N.S. Ramaswamy, head of commodities and customer relationship management at Ventura Securities, told Informist.

 

ING Economics pegs copper prices on LME at $9,100 per tonne in the first quarter of 2025, while it has forecast prices at an average of $8,900 per tonne next year. At the time of writing this report, the three-month copper contract on the LME was at $8,967 per tonne.

 

Kedia expects copper prices to touch INR 1,100 per kg on the domestic bourse next year, with resistance seen at INR 1,150 per kg.

 

ZINC

Zinc outperformed other non-ferrous metals this year, mainly due to supply tightness. "The zinc market is set for a dynamic year in 2025, continuing the recovery momentum built in 2024. While challenges such as supply constraints, high energy costs, and sluggish demand from key sectors like construction and manufacturing persist, the market's fundamentals indicate potential for growth, supported by emerging opportunities," Kotak Securities said in a report.

 

A string of mine setbacks substantially reduced supplies of zinc ore and concentrate, rocking the zinc market. The metal is also facing a supply deficit of 164,000 tonnes in 2024, against the market's expectation of a deficit of only 56,000 tonnes. This was driven by the third consecutive year of declining global mine output, Ramaswamy said.

 

The International Lead and Zinc Study Group, however, holds a contrarian view. According to preliminary data from the group, the global refined zinc market was in a surplus of 19,000 tonnes over the first 10 months of 2024. The group expects the zinc market to be in a surplus of 148,000 tonnes in 2025, which could weigh on prices.

 

Additionally, a strengthening dollar index could lead to headwinds for industrial metals and limit the upside. Kedia expects zinc prices on MCX to hit INR 340 per kg in 2025, within a range of INR 218-INR 365 per kg.  End

 

US$1 = INR 85.27

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Avishek Dutta

 

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