Base Metals Monthly Report

Tuesday| September 10, 2013

Base Metals Monthly Report

Angel Commodities Broking Pvt. Ltd.

Reena Rohit Chief Manager Non-Agri Commodities and Currencies reena.rohit@angelbroking.com (022) 3935 8134

Anish Vyas Research Analyst Non-Agri Commodities and Currencies anish.vyas@angelbroking.com (022) 3935 8104

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Base Metals Monthly Report

Tuesday| September 10, 2013

Weaker Rupee pushes base metals sharply higher during August13

Prices of base metals on the MCX bolstered in the last month (Aug13), gaining much more than that in dollar terms as weakness in the Rupee supported upside. Chart 1 and 2 below show the difference in terms of percentage gains on the LME and the MCX. Start Starting ing with aluminum, gains on the LME were restricted to around 0.8 percent last month, but on the MCX, aluminum prices jumped a whopping 11.6 percent. Nickel on the other hand closed the month of August13 around 0.4 percent lower on the LME, but depreciation on in the Rupee led the metal close higher by almost 11 percent on the MCX. This shows how the currency factor is crucial for Indian commodity prices. In the current context, the Rupee is witnessing a reversal and if this trend continues, then prices of co commodities mmodities in the Indian markets could face a beating.
Chart 1: LME Base Metals Aug'13 Performance (% Chg)
5.5 4.5 3.5 2.5 1.5 0.8 0.5 (0.5) Lead Copper Zinc Aluminum 9.0 8.0 Zinc Copper Aluminum Nickel Lead 4.2 3.3 3.1 11.0 10.0 14.0 13.0 12.3 12.0 11.6 10.9 10.9

Chart 2: MCX Base Metals Aug'13 Performance (% Chg)

13.8

(0.4) Nickel

Source: Reuters, Angel Research

Strong manufacturing data supports prices

The fundamental factors that supported overall gains in base metal prices in dollar terms included positive manufacturing data from the advanced economies and China along with upbeat second second-quarter GDP growth of the advanced economies economies. While main fundamental drivers that have been driving downside pressure in prices since the start of the year have been largely negative, especially on the emerging markets front; it is now the recovery in the advanced economies like Euro Zone, UK and the US that is eventually coming to the rescue. Chart 3: Manufacturing PMI of Major Economies Chart 3 shows the index of manufacturing PMI for 56 55.4 Index value above 50 54.6 major advanced and emerging markets. Data 55 indicates growth and below suggests that US, UK, Germany, overall Euro Zone, 54 50 shows contraction Italy and China show the manufacturing index 53 52 52 51.3 reading above 50, indicating expansion, while that in 51 50.4 50.3 49.8 49.7 Spain, France and India is below 50, showing 50 48.5 contraction. Concerns ns with respect to the Indian 49 economy have heightened as the manufacturing 48 47 index reading slipped below the 50-mark.
Source: Reuters, Angel Research

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Base Metals Monthly Report

Tuesday| September 10, 2013

Nickel prices fall the most in 2013

Over the year, all base metals have shown a decline in prices, but nickel prices on the LME 0.0 have lost almost 20 percent (Chart 4), marking (2.0) (4.0) the steepest fall within the complex. (6.0) Fundamentals in case of most metals are (8.0) (7.5) bearish on the back of slowdown in Chinese (8.2) (10.0) economic growth. In case of nickel however it is (10.5) (12.0) (12.1) also the situation ation of oversupply that is adding (14.0) (16.0) to the woes. Oversupply of stainless steel has (18.0) led to plant closures and mills in China too are (20.0) (19.4) operating below capacity. Rate of demand Lead Zinc Copper Aluminum Nickel Source: Reuters, Angel Research growth in US, EU and China is low; however, in the long run decline in demand of the these se countries would likely be compensated with new stainless steel capacities coming up in emerging countries. For 2013, global demand growth for nickel is expected to be at a slow rate of 3 percent, a sharp drop from growth levels of 10 percent in 2012. Fo For r the remainder of the year as well, nickel is expected to witness a bearish trend due to weak demand demand-side side fundamentals.
Chart 4: Base Metals LME Y-T-D D Performance (% Chg)

Copper Gains 3 percent in August August13

Copper Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 LME ($/tonne) LME % Chg MCX (Rs/kg) MCX % Chg Inventory (Tonnes) 8,200 3.2 440.05 -0.8 376,000 7,816 -4.7 418.10 -5.0 458,775 7,533 -3.6 410.20 -1.9 571,125 7,037 -6.6 381.00 -7.1 618,175 7,276 3.4 413.05 8.4 611,125 -7.0 406.60 -1.6 662,275 6,765 6,886 1.8 421.55 3.7 610,725 7,111 3.3 473.35 12.3 588,000 Inventory % Chg 17.3 22.0 24.5 8.2 -1.1 8.4 -7.8 -3.7

LME Copper prices rose by more than 3 percent for the second consecutive month in August August13. Prices increased as LME copper inventories plunged for the second straight month by around 3.7 percent. Shanghai copper inventories also declined by more than 3 percent in the month of A August13, thus adding additonal support to prices prices. . Global refined copper production showed a production deficit of 17,000 tonnes in May13 after showing a surplus for seven consecutive months and this too became supportive for copper prices. In the Chinese se markets, copper commanded all all-time time high premiums on account of delayed shipments, shipments thus aiding further rise in prices. . Premiums during the last month were seen at an average of $185 per tonne and reached a record high of $210 per tonne. Prices on the LME gained after fabricators had to pay additional fees apart from cash settlement prices which were observed as a result of lower than estimated local output.

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Base Metals Monthly Report

Tuesday| September 10, 2013

Decline in stocks in Chinese warehouses during the first half of 2013 led to upside 8,300 710,000 movement in copper prices (Chart 5). Initially, 8,100 660,000 there was picking up in spot buying by 7,900 610,000 7,700 domestic semi-fabricators fabricators in response to 560,000 7,500 lower prices mainly in second quarter when 7,300 510,000 demand peaks up traditionally. Another 7,100 460,000 factor was tight scrap market arket this year has 6,900 410,000 forced fabricators to increase their ratio of 6,700 360,000 6,500 primary cathode to scrap which is used in Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 factory furnaces. Last but not the least of Copper Inventory (Tonnes) Copper LME ($/tonne) Source: Reuters, Angel Research recent fall in stock is because traders have exported metal to Asian LME registered warehouses mainly in Johor Malaysia in response to rented deals provided by warehouse operators with favorable price differentials and incentives.
Chart 5: Copper LME Price vs. Inventory (Month-end (Month close)

Copper SHFE inventories witnessed a sharp decline since April13 (Chart 6). Factors that contributed to the fall in inventories include rise in spot buying due to demand from semi semi-fabricators fabricators, lower price levels and a tight scrap market forced fabricators to increase ratio of usage of primary cathode to scrap. Additionally, Chinese traders exported xported copper to Asian LME warehouses, on the back of good price differentials to store metal in these warehouses.

Chart 6: SHFE Copper Inventories (Tonnes)

268000 248000 228000 208000 188000 168000 148000 1/4/2013 2/4/2013 3/4/2013 4/4/2013 5/4/2013 6/4/2013 7/4/2013 8/4/2013 Source: Reuters, Angel Research

On the macroeconomic front, favorable manufacturing data from major global economies showed signs of global economic growth. Further, the Chinese government came up with new policies to support economic growth, by including infrastructure projects and rail investments. This factor has led to expectations of rise in industrial demand for the metals, and thereby becoming supportive for prices.

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Base Metals Monthly Report

Tuesday| September 10, 2013

Aluminum Prices rise despite rising inventories

Aluminum Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 LME ($/tonne) LME % Chg MCX (Rs/kg) MCX % Chg Inventory (Tonnes) 2,096 1.4 110.6 -0.9 5,155,300 2,007 -4.3 105.45 -4.7 5,172,550 1,903 -5.2 103.65 -1.7 5,228,425 1,869 -1.8 100.15 -3.4 5,152,825 1,902 1.8 105.9 5.7 5,198,375 1,775 -6.7 105.05 -0.8 5,450,175 1,804 1.6 105.75 0.7 5,471,100 1,818 0.8 118 11.6 5,400,350 Inventory % Chg -1.1 0.3 1.1 -1.4 0.9 4.8 0.4 -1.3

Aluminum prices on the LME continued to trade higher for the second consecutive month. Prices witnessed a rise of around 0.8 percent and touched a high of $1949/tonne in the month of August13. The major reason for upside in aluminum prices during the last month was on account of decline in global inventories of the metal. LME Aluminum inventories dropped around 1.8 percent and stood at 54,00,350 tonnes in August13 (Chart 7).
Chart 7: Aluminum LME Price vs. Inventory (Month-end (Month close)
5,500,000 5,450,000 5,400,000 5,350,000 5,300,000 1,900 5,250,000 5,200,000 5,150,000 5,100,000 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 1,850 1,800 1,750 1,700 2,150 2,100 2,050 2,000 1,950

Aluminum Inventory (Tonnes)

Source: Reuters, Angel Research

Aluminum LME ($/tonne)

Also, the global unwrought aluminum inventories monitored by the International Aluminum Institute (IAI) declined 6,000 metric tonnes in July13 when compared with June13. Inventories plunged by 190,000 1 metric tonnes when compared with the same period in 2012. This factor supported gains in prices. Further, total unwrought inventories were at 1.173 million metric tonnes in July13 from 1.179 million metric tonnes in June13. When compared with inventories inve of 1.363 million tonnes in July12, the scenario indicates a downward trend.

Another factor that supported Aluminum prices was increase in demand for the metal in China. Improvement in the construction and the real estate sector acted as a strong positive on the consumption front. Also, auto production rose by 12.83 in first half of 2013 in China and additionally added upside to prices. Apart from fundamental factors, macroeconomic developments also played a crucial role in directing prices. Upbeat manufacturing data from major global economies came as a relief to weak market sentiments that were indicating a slowdown in consumption of ba base se metals. Additionally, strong economic data releases from the US helped ease overall market concerns. The quarterly US GDP showed an increase and unemployment rate in the worlds largest economy witnessed a fall; thus boosting sentiments that the US was on the track to growth. In this case, we have also seen intraday sentiments witness volatility as positive US economic data also suggests strongly that the Federal Reserve could

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Base Metals Monthly Report

Tuesday| September 10, 2013

soon make the pullback. But since the monthly trend in prices is seen, the ove overall rall impact of strong US economic data has been positive for the base metals pack largely. Performance of Aluminum on the domestic bourses has been phenomenal on the MCX last month. Sharp gains of almost 12 percent were seen, with average prices rising to Rs.115/kg in August13 as compared with Rs.106/kg in July13. Reason for sharp increase in MCX prices was the weaker Rupee that lost around 8.8 percent in the month of August13 on account of weak domestic economic fundamentals coupled with constant outflow ow of foreign funds from equities and debt markets. The currency even touched an all time low of 68.93-mark mark in the previous month. In the current year, aluminum prices on the MCX are up by around 4.3 percent as Rupee depreciation has supported an upside in prices. On a year till date basis, Rupee has depreciated around 20 percent percent.

Outlook
The month of September13 has begun with positive economic data from China and this factor is expected to be supportive for base metals. However, the trend in metal price prices s over the month is expected to be mixed on account of a multiple factors factors, , from economic developments to geopolitical factors that are providing direction. In the Indian markets, movement in the Rupee will be extremely crucial and appreciation in the curre currency is expected to cap sharp gains in metal prices.

Technical Levels (1 Month)

Metals MCX Copper Nov13 (Rs/kg) MCX Zinc Sep13 (Rs/kg) MCX Lead Sep13 (Rs/kg) MCX Nickel Sep13 (Rs/kg) MCX Aluminum Sep13 (Rs/kg) Support 2 420 108 122 820 103 Support 1 455 114 130 860 109 CMP 472.50 119.70 136.70 890 114.30 Resistance 1 490 127 144 930 121 Resistance 2 510 134 153 980 127

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