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Now, there are no takers for the base metals in the market. China, India and other buyers have reduced imports for these metals and the inventories are piling up at several ports across the globe.
17 Feb 2009
Commodity Online
MUMBAI: When the world was celebrating the never-ending rise of commodities a few months ago, it never expected such a huge fall after the gain.

But, with the unfolding of US economic slowdown, the reality slowly dawned on the world and commodities prices also suffered. The main commodities hit by the recession were base metals.

Till recently every investor was gung-ho about the base metals like copper, zinc, nickel, lead, and aluminum following increased demand from countries like China and India.

A few months down the line, things have changed drastically for the worst.

Now, there are no takers for the base metals in the market. China, India and other buyers have reduced imports for these metals and the inventories are piling up at several ports across the globe.

The result is simple. A crash in prices. Already within corrective environments, the stock panic has bled the base metals to dangerously unhealthy levels. Copper, zinc, nickel, lead, and aluminum have seen declines of 69%, 77%, 84%, 78%, and 61% respectively from their recent highs.

A few months ago copper, zinc, nickel, lead, and aluminum had gained 574%, 523%, 1124%, 829%, and 151% respectively.

But how things can change in such short order. The stock panic of 2008 wreaked havoc on virtually every asset class, and the base metals were not immune to the carnage.

These losses have been devastating for investors and speculators who had positions in anything base metals related.

Considering the massive gains the base metals have had in such a short period of time there is no doubt they’ve experienced extreme volatility. And this volatility has occurred both on the upside and the downside.

In 2006, when it became apparent that China was systematically ravaging the copper supply, fears of stocks drying up caused some panic. And this opened the doors for a long season of extreme volatility.

Copper’s wild early-2006 movements put it on the map for mainstream investors. Copper moved up 91% in only 60 trading days.

However, with 2008’s stock panic infecting the entire global economy, a radical shift in base metals fundamentals has been quick to decimate copper.

With demand growth quickly slowing and then shifting to declining, supply quickly caught up and the supply-deficient imbalance disappeared.

Since September LME copper stockpiles have more than doubled. Then copper prices nosedived 69% since its July high to levels not seen since 2004. In a massive breakdown that was accelerated by the stock panic, copper has experienced a technical bloodbath.

Even though copper is still up 144% since the beginning of its bull, its relative performance has been abysmal.

Zinc’s bull run also started out almost the same way as copper’s. From its 2003 low zinc gradually rose higher, gaining an impressive 93% to its high in the first half of 2005. But like copper, that rise ended soon.

Aluminum’s case is also not different. Its strong initial rise and the velocity of its gains appear in line with the others.
However, it took 4 years for aluminium to gain 62%. Though inspiring in the grand scheme of things, this vastly underperformed the rest of the base metals.

After a bit of a pullback in mid-2005 aluminum then set course for its version of a massive upleg. After aluminum achieved its 2006 rise, it then spent the next 2 years or so volleying around in the $1.00 to $1.50 range.

During this time LME aluminum stockpiles were hovering at very low historical levels.

Interestingly in the first half of 2008 aluminum was the best-performing base metal.

And the fall started in July 2008. In only 7 months, aluminum’s entire bull market gains have disappeared. Most of these metals were already in corrective environments as the gaps of years-long imbalances were contracting as a result of demand growth easing and the miners steadily ramping up supply.

It may take an extended period of time for supply-side imbalances to settle prices of base metals into a logical range.

Base metals prices have fallen so hard and so fast that the mining industry is now faced with a huge problem. In many cases the production costs of these metals are well above where the market prices are. And with mining companies now losing money, the only thing left to do is halt the development and production.

Now volatility is still likely to be the name of the game for base metals futures and the stocks of the companies that explore and mine them.
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