US Credit Rating downgrade takes sheen off base metals

Kolkata Prices of base metals have shown a downward slide following news of US losing its triple A rating. Copper, which has remained firm and was moving steadily toward its February 2011 peak level of $10,214 per tonne, lost nearly 1% on Saturday. Aluminium, which had gained 3% in past three weeks, is also likely to follow suit since the derating gives a strong indication all is not well with the global economy.

Government debt problems in Europe also played a part to add to the slide, with Italy and Spain under pressure to rein in debt. International agency reports said the most actively traded contract, for September delivery, settled down 11.85 cents, or 2.8%, at $4.1170 a pound on the Comex division of the New York Mercantile Exchange.

However, analysts point out this could be more of a knee jerk reaction. “China and India together make up for large chunk, which is nearly 26% of global demand. As long as demand remains strong in these two countries, we do not expect a major erosion in prices. At most, there could be around 10% volatility in prices linked to speculation,” Kishor Ostwal, chairman and managing director, CNI Research, said.


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Copper prices act as a strong indicator of economic growth Apart from its use in power sector and electricity, the metal finds use in computers, ACs, and cars consumer items whose demand falls when there is low economic growth. Similarly, China and India along with Japan, which is investing in post tsunami reconstruction are expected to keep fuelling global aluminium demand. “The US downgrade had more or less been factored in by the markets. Copper and aluminium have major industrial uses and is thus sensitive to economic uncertainties.

However, we do not see any major dip in metal prices with Asian demand remaining strong,” a Mumbai based analyst added. In global markets, a better-thanexpected United States jobs report failed to lift the mood. The US economy added 117,000 jobs in July, beating expectations of a 75,000 increase, while the unemployment rate fell to 9.1% from 9.2% in June.

The other factor that affected the mood was the end of industrial strife at the world’s largest copper mine, Escondida in northern Chile, where workers reached a wage deal Friday. The fortnight-long strike had stalled copper output, triggering concern about global supply and raising copper prices. Incidentally, Chile-based Escondida accounted for almost 7% of global copper production last year. In fact, it was part of a series of production glitches at major copper mines has pushed copper prices up in recent weeks. Copper output has lagged behind growing global demand for the metal. This has also prompted analysts to forecast a production shortfall in 2011 and 2012.