Global growth is likely to pick up in response to stronger growth in advanced economies. Euro-zone growth could improve because of (a) reduced pace of fiscal tightening and (b) stronger exports, but weak domestic demand and a fragile banking system could increase deflation risks that could force the European Central Bank (ECB) to turn further accommodative.

 

The US economy could grow above the trend over 2014-15, in response to the fading fiscal drag and improvement in private demand allowing the Fed to wind-down the third round of quantitative easing (QE3) by end-2014 and begin raising rates in 2015. But anyone expecting a sharp fall in prices across commodities as the Fed gradually reduces its bond buying through 2014 is in for a surprise. The prices of most industrial commodities tend to strengthen as the cycle unfolds. If the start of tapering shows the Fed is getting more positive on the growth outlook, then the prospects for commodity demand are almost certainly improving, too.

 

New exploration constraints

Future supply of zinc and lead was expected to be constrained, as not enough discoveries of these metals were being made. Discovery rates in gold and silver have been healthy owing to rising prices, while discovery rates in base metals have been dismal because of the falling prices. Global exploration spend increased from $2.9 billion to $29.4 billion over the last decade, with exploration spend having reached an all-time high in 2012. Owing to lower commodity prices, exploration spend is forecast to drop by 20 per cent in 2013 and by another 15 per cent by 2020. Funding challenges would continue to include increasing exploration costs (labour, drilling and administrative costs) and a decrease in the rate of new discoveries.

 

Chinese demand

Uncertainty over Chinese demand continues, as growth is likely to remain subdued because of softer domestic growth and comfortable stock position. Base metals are sensitive to economic data from China, which is the world's biggest consumer of industrial metals. Copper is used in a wide range of industrial products, including automobiles, wiring and home appliances, making prices sensitive to such economic data. China accounts for about 40 per cent of global copper use. Recent reports on the country suggested the pace of economic expansion slowed in December, weighing on sentiment in the copper market. China's housing market could moderate this year. Average housing prices are expected to rise five per cent, said ratings firm Standard & Poor's, with housing sales projected to grow 10 per cent. Increases in urbanisation and disposable incomes will underpin demand for homes this year.

 

Meanwhile, Chinese copper consumption could surprise to the upside this year after the state grid forecast a 13 per cent increase in spending. The power sector accounts for more than 40 per cent of Chinese copper demand, and outsized spending in 2013 helped tighten the Chinese market for most of the year. This suggests copper demand from the power sector could stay stronger, in 2014 too.

 

Indonesian ore export ban

Indonesia's announcement of the ore export ban has had a considerable sentimental impact, but the effect of the ban on global ore supply in real terms seems to have been limited. China, which accounts for about half of global nickel demand, has enough stocks to last six months.

 

Early closure of the Century mine is a positive development for a supply worry mainly in zinc. However, it is also important to acknowledge the current inventory picture, which offers a sizeable enough buffer to moderate the degree of price rise.

 

Global copper usage is expected to grow by 4.5 per cent in 2014 with world-ex-China expected to grow by 2.5 per cent, data from the International Copper Study Group showed. The above factors clearly indicate that even though Chinese demand is unlikely to grow, advanced economies could more than compensate and with new exploration rates dropping sharply, we remain bullish in selective base metals like copper, zinc and nickel in the coming year.

 

We expect LME Copper to range between $6,900/mt and 7,600/mt and the domestic prices to range from Rs 445 to 495 in the coming months.