Expert take: How you should trade base metals next week

From a macro perspective, hawkish comments from Fed Chair and other US Fed officials at the Jackson Hole meeting have been keeping upside limited in base metals.

The recent inflation data unexpectedly beat market expectations and renewed fears that the markets could witness a hefty rate hike in September has also been pressurizing markets.

At present, markets have already priced in a 75-bps hike in interest rate in September, while 24 per cent of participants expect a 100-bps hike next week.

Any hike will push the US dollar higher and weigh on prices. However, volatility in base metals will continue as other central banks will also look to hike rates.

ECB, BoE, BoC are all looking to curb inflation and will hike aggressively in the coming few months.

On the China front, things are relatively optimistic. Recently, data improved in August, especially the medium and long-term credit, along with fixed asset investment and retail sales data which reflects recovery in the domestic demand.

Additionally, property developers have also ensured the full resumption of suspended housing projects, boosting market confidence.

In terms of fundamentals, LME copper inventories kept falling and are currently around 1,00,000 MT, but LME copper cash to 3-month backwardation hit a new high around $150 per tonne since the end of November last year, reflecting tight supply in the spot market.

Moreover, potential supply disruptions have also worried the market after news that workers at Chile’s Escondida copper mine, the world’s largest copper mine, threatened to strike due to safety concerns.

In China, copper smelters in some regions have returned to normal operating levels after the power rationing was lifted.

With regards to the power crisis in Europe, the zone continued to deal with a power crisis that has cut output of aluminium.

Around 50 per cent of the EU aluminium production capacity has been forced offline due to the power crisis which could see the energy-intensive metals could continue to outperform in the short run.

On the other hand, aluminium output rose in China in August as new production capacity came on line, more than offsetting curbs on power use in some areas. So, markets could continue to remain volatile.

It remains to be seen how rapidly the demand will recover in the peak season, the macro risks have subsided when compared with August.

Tight supply could sustain copper and aluminium prices at high in the short term.

But the Fed’s September FOMC meeting will need a close review and a hawkish stance of the US Fed will put pressure on copper and rest of the base metal prices in the medium term.

Additionally, the IMF sees further global economic slowdown in the third quarter which will dent demand. So, prices are expected to be volatile with some downward potential.

It is expected

copper can trade between Rs 610- 685, while MCX zinc can trade between Rs 268-290 and MCX aluminium can trade between Rs 190-209 for the rest of September, with the trend weak and we suggest sell on rise near or at the resistance.

(The author is Sriram Iyer, Senior Research Analyst-Commodities & Currencies,

Securities)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)