Rally continues, most base metals end at their year-highs

Rally continues, most base metals end at their year-highs

The unprecedented run-up in base metals continued in December with most of them ending at their respective year-highs.

Most base metals have doubled from their 2008 and 2009 lows and the rally shows no signs of exhaustion.

Over the last one month, the performance of the base metals pack has surprised many as they managed to end on a strong note despite a stronger dollar and rising concerns over the state of a few European economies. Global inventory levels, too, gradually inched up in the fourth quarter of 2009.

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Spot iron ore prices have rallied sharply over the last 45 days, rising towards its 2009 high. The rally has been led by a surge in off-take by Chinese steel manufacturers and on expectations that contract prices for 2010 will be 20-30% higher than 2009.

We believe that a strong demand recovery in the steel market in 2010 and a tight iron market will lead to iron ore contract price settling 30% higher than benchmark contracts in 2009.

The dollar managed to register a sharp rebound against major countries over the last one month on better than expected US economic data and rising concerns over some European economies.

Economic data released in the first half of December showed some recovery in the US. On the other hand, Fitch downgraded credit ratings of a few European nations, leading to a sell-off in the euro against the dollar. The bounce-back witnessed in the dollar was also seen against major commodity producing nations, such as Australia and Chile. However, against the rupee, the dollar traded in the narrow range of 46-47 over the last one month. On a month-on-month (m-o-m) basis, it ended with gains of 0.6%.

On a year-on-year (y-o-y) basis, copper registered the highest gain followed by lead and zinc. Aluminium remained the underperformer among the base metals pack, registering gains of 45.4% y-o-y.

Inventory levels of copper and zinc have witnessed a gradual rise over the last two months as strong prices of both the metals led to a rise in production levels, globally.

The rally in spot prices has also been due to the restricted supply in the domestic market.

Chinese iron ore imports continued to surge, registering a growth of 57% on y-o-y basis and 10.4% on m-o-m basis. We believe that contract prices for 2010 will be 30% higher y-o-y, which is lower than the current spot price.

Meanwhile, steel prices remained subdued over the last one month and Chinese HRC export prices remained below the $500 per tonne mark. The jump in global production has capped the upside for steel prices in the near term. November global steel production was 24% higher on y-o-y basis.

Graphics by Yogesh Kumar/Mint