Byline: Ranjit Shinde

The year '06 was as action-packed as it can be for the commodity markets across the world. Though a lot of commodities witnessed volatility in prices, metals and bullion stole the show in terms of gains within a year.

In the metals space, non-ferrous metals

were traded at prices never seen before. Prices of copper, nickel, lead, tin and zinc hit the roof in '06. Lower inventories, pick-up in demand from the user industries and growing interest of hedge funds in the commodities segment were the major forces behind the overall uptrend in prices.

The rise in nickel prices on the London Metal Exchange (LME) was the sharpest among all. The metal, which is used mainly in production of stainless steel, was quoted at an all-time high of $35,455 per tonne on December 15. This fell slightly to $34,300 per tonne on December 22, still reflecting a rise of 154% from that at the beginning of the year.

This dramatic jump in price followed depleting nickel inventory and upbeat steel production in China. In October, monthly nickel stock at LME warehouses was at its lowest in the past six years. Moreover, it was one-third of its year-ago level. This made the supply situation tight.

On the demand front, China pumped 21.2% more steel in the world market during the first nine months of '06, in turn, escalating demand for nickel. As per market sources, it will take at least four years for new nickel capacities to come online. So, going ahead, replenishment of inventories may be a matter of concern.

Higher steel production across the world caused a wild run in prices of yet another metal, zinc. As much as 75% of total zinc supply is used in manufacturing of galvanised steel. On LME, price of zinc peaked at $4,619.5 per tonne during the last week of November on the back of lowest ever inventory as of October.

Other non-ferrous metals such as tin and lead also enjoyed a strong rally in prices during '06. This was mainly fuelled by growth in the activity of user industries. Tin is used in electronic circuitry as a soldering component and also finds use in alloys and tin plates.

Lead is used in storage batteries and in applications to block X-ray and gamma radiations. In case of aluminium, prices did peak in May, but softened subsequently following increased supplies of alumina. Nevertheless, these saw a double-digit jump by the third week of December reckoned year-on-year.

Steel gained most of its lost shine back during '06. Having witnessed a sluggish trend since the second half of '05, prices started peaking in the middle of '06. HR steel with 8-10 gauge specification was quoted at Rs 32,500 per tonne on 22 December in the Delhi market, a smart recovery from the lows of Rs 25,500 per tonne at the beginning of the year.

The otherwise sombre counters of precious metals also glittered in '06. Prices of rhodium and silver had a phenomenal run during the year. Notwithstanding its largely famous correlation with petroleum prices, gold prices continued their upturn despite sluggish oil prices. Benchmark prices of crude oil did hit an all-time high in June but only to slip later.

So far, so good. But, will the action continue in '07? In case of non-ferrous metals, there still appears to be a head room for zinc prices. Industry sources point at the demand-supply gap that is widening with depleting inventories.

The zinc stock at the LME warehouses is at a six-year low. Moreover, while demand from user segments remains firm (most of it coming from China), any major capacity additions in zinc concentrate are expected only in '08.

In case of copper, the inventory build-up in '06 is likely to drain partially in coming months. Moreover, we learn that a major concentrate supplier in the world has achieved a significant reduction in treatment charges from the smelters.

This is an indicator of a shift of pricing power from the smelters to the suppliers. All this is likely to keep copper prices firm in the near term. Prices of aluminium may soften following an upsurge in Chinese alumina capacities in recent months. This, in fact, has already resulted in a crash in alumina prices as supply-side pressure has eased.

Trend in prices of tin, nickel and platinum group of metals will largely remain a function of performance of user industries. Hedge funds, with their renewed appetite for commodities, will play a significant role in the future course of commodity prices.

ranjit.shinde@timesgroup.com mailto:ranjit.shinde@timesgroup.com