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Base metals rally unlikely to sustain in 2017

MUMBAI: The year-to-date rally in base metals, driven by mining shortages amid a Chinese housing boom and hopes of a jump in US fiscal spending on infrastructure, is unlikely to sustain over 2017 because of deleveraging in China`s housing market and supply recalibration addressing any potential increase in global prices, said base metals analysts.

Zinc has railed by 60% to $2562 per tonne so far this year, followed by copper (18.2%- $5500/tn), nickel (16%- $10200/tn), lead and aluminium which rose by over 14% each to $2050/tn and $1720 a tonne, respectively.

The rise was on the back of increased Chinese housing and automobile demand. Easy credit has led to heavy speculation in China`s property market - good for copper -- which its central bank wants to curb now. Also, demand for base metals like aluminium and lead jumped because of a 50% tax rebate on small car engines and increase in use of battery propelled bikes. The rally got further legs after US President elect Donald Trump promised to spend $1 trillion over the next 10 years on building roads, ports, highways and bridges in the country.

But, analysts like Hitesh Jain of IIFL Wealth & Asset Management and Suresh Nair, ED, ADMISI Commodities, caution that while the rally could continue in the short term, rising supply at higher prices would cap further upside.

China is by far the world`s highest consumer of refined non-ferrous metals at 48-50% and its largest producer of refined base metals at 40%. In comparison the US accounts for just 8% of global demand, say analysts. A slowdown in China`s growth to around 6.7% from earlier years` 8-10% amid weak external demand and deleveraging in its property market does not bode too well for its appetite for base metals. Besides, a short term jump in prices because of probable increase in US demand will cause supplies, already at delicate balance, to rise.

"Unsustainability of China`s growth caps upside in base metals in 2017," said Jain. "US`s proposed fiscal spend of $1 trillion over 10 years won`t in a meaningful way have the same impact as increase in China`s demand has. Besides world supply will catch up with any shortfall over the next six to nine months, putting a cloud over the sustainability of the rally." Prathamesh Mallya, chief manager, non-agro commodities at Angel Broking said that punters on metals and energy exchange MCX could go long base metals to profit from a short term upside that`s expected to continue next year.

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