Demand for EVs to boost rally in copper and nickel

A spectacular rally in copper has enthralled market participants as prices have been marching ahead almost every month since testing the lows of Rs 335.95 per kg in mid-March 2020. It is not just about copper which has climbed to record highs of around Rs 737 a kg at MCX, and is trading close to a decade’s high at LME, the entire base metal complex is witnessing a euphoric move driven by optimism about swift economic recovery from the pandemic, vaccine rollouts gathering pace and huge liquidity being pumped into the global economy by major central banks and governments across the globe. The resumption of buying by China after Lunar New Year holidays has further acted as a catalyst for this unabated run in the base metal complex.

Copper, the economic barometer, is portraying an affirmative picture as the global economy is stabilizing. Apart from the dramatic increase in liquidity and low interest rate regime favoring prices, the demand for the red metal is primarily led by the strong demand from China as its economy has managed to absorb the pandemic shock and the manufacturing sector is back on track. China has been aggressively spending on its metals-intensive infrastructure, loading up commodities voraciously in its quest to boost the economy. China’s industrial output has even returned to pre-Covid levels, reflecting strong appetite for commodities.

Besides, copper supply has also been shrinking which has raised expectations of a historic deficit in the metal this year, fuelling prices. Copper inventories are hovering near multi-year lows at LME as well as Shanghai, and lack of new mine investment over the last few years could intensify the supply shortfall. As per the estimates, copper mined production is expected to dwindle towards 12 mt by 2034, as compared to 20 million tonne currently. Even reserves of several key mines are depleting.

In case of zinc, supply constraints are leading to an upwards swing in prices. Zinc production had seen a decline in 2020 due to lockdown restrictions, while China’s refined zinc output is expected to shrink in February as well.

Though a laggard earlier, aluminium has remained elevated in the past month in tandem with other base metals as traction is seen from industries such as consumer goods, food and packaging, healthcare, infrastructure, and automobiles. Aluminium, considered to be a green metal and the best alternative to plastic, is expected to witness incremental demand of around 2 per cent in 2021, as the world is switching towards green and clean resources. The light metal is 100 per cent recyclable without any quality degradation and carries low carbon footprint.

Going ahead, there can be some steep corrective moves after the strong advance, but the overall outlook is positive for the entire base metal complex. Another round of $1.9 trillion fiscal stimulus package from the US can further underpin prices. Additionally, green initiatives across the globe and transition towards electric vehicles are a big positive for copper and nickel. EVs require a considerable amount of copper, almost three times more than the regular ones. Nickel too is expected to benefit amid the growing demand prospects for EV batteries. The expected shift towards EVs through the decade will require large amounts of copper and nickel, especially by China and the entire world as well. Furthermore, nickel is thriving amid improving macroeconomic scenario and higher consumption of nickel from the stainless steel sector, which is set to witness growth of around 2.2 per cent per year.

As far as the price outlook is concerned, we anticipate copper prices to eventually march towards $10,000 per tonne at LME or around Rs 765-770 per kg at the domestic bourses, while zinc has the potential to test Rs 255-270 per kg if prices manage to sustain above Rs 236/kg mark from a medium term perspective. Nickel looks poised to chart its course towards Rs 1,540/kg mark and even higher, if prices manage to close above the level of Rs 1,420/kg.

(The author is VP- Metals, Energy and Currency Research, Religare Broking)

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