Improvement in macro sentiment leading to recovery in aluminium, copper prices: ICRA

Jan 9,2020

ICRA has said that prices of aluminum and copper are showing signs of recovery in the last three months as trade tensions in international markets have eased to an extent leading to an improvement in sentiment. Consequently, while aluminum prices at the spot market have increased by 4 percent in the last three months, the improvement in copper prices in the same period have been stronger at 10 percent. At the same time, zinc prices have corrected 3 percent due to a prevailing surplus of zinc in the global market, which has kept prices subdued.

“The prevailing global supply-demand scenario in both aluminum and copper has been conducive to a price recovery, given the deficits of these metals in the physical market," said Jayanta Roy, Senior Vice-President, and Group Head, Corporate Sector Ratings, ICRA. "But weak macroeconomic sentiments arising out of the trade tensions weighed on prices thus far,” added Roy.

Macro-economic uncertainties, as well as weaker sentiments due to the trade war, have led to a sharp slowdown in global consumption growth rates of aluminum and copper to around 0.1 percent and 0.3 percent, respectively, during 9m CY2019, from the approximately 4.0 percent and 2.3 percent growth rates registered in CY2018.

As per ICRA, despite muted consumption levels, the markets of these two non-ferrous metals continued to remain in deficit during this period, with shortages expanding on a Year on Year basis as production growth rates were even lower than the growth rates in demand. The slowdown in production growth of aluminum and copper was, in turn, a result of capacity constraints, which is unlikely to improve significantly in the near term as utilization rates of operating capacities is already high.

"The global aluminum market has remained in deficits, varying from 0.07 to 1.05 million metric tonnes for the last ten quarters, because of capacity cutbacks in China. While aluminum production in the country started increasing in the second half of the last calendar year, a further shut down of some loss-making capacities resulted in a production de-growth from March to September 2019. No meaningful improvement in the supply scenario is envisaged in the near term as the idled capacities are unlikely to resume production unless aluminum price strengthens further. Moreover, the total capacity of fresh aluminum smelters to be commissioned globally in the near term is also limited. The copper market has also remained in deficits in the last six quarters post-shutdown of the 0.4 million metric tonnes copper plant of Vedanta in Tuticorin," a release from ICRA mentioned.

On the other hand, a prevailing surplus of zinc in the global market has kept its price subdued. For instance, in the last three months, zinc prices have corrected by 3 percent. During the current calendar year, global mine production of zinc has increased through a ramp-up in production in newly operationalized mines in Australia and South Africa.

Higher mine production has, in turn, led to higher metal production of 0.9 percent in 9m CY2019, when consumption growth of the metal was muted at 0.3 percent. Although cumulatively the global zinc market was in a deficit of 0.21 million metric tonnes during 9m CY2019, the market turned into a surplus in October 2019, and the trend is likely to continue, going forward, which in turn would keep zinc prices under check.

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