Base Metals Plunge on Worries over US Liquidity Tightening

SHANGHAI, Feb. 21 (SMM) – The Federal Reserve released the minute for its policy meeting held January 29-30, and raised market worries that the central bank may end QE3 measures earlier than expected. In this context, base metals plunged. China's base metals marched down after starting lower on February 21, with SHFE copper falling for four consecutive days and registering new lows thus far this year.

Base metals price increases in late 2012 largely resulted from easing measures introduced by major economies. The latest Fed's minute showed that policymakers' divergence over ending monetary stimulus earlier than planned is growing. The minute also indicated the Fed tends to tighten liquidity, pushing the US dollar index above 81. However, a basket of other major currencies including the euro experienced drops.

The UK's central bank has the intention of expanding asset purchase scale by 25 billion pounds, while the ESM expressed concerns over the debt outlook for both Cyprus and Italy. As such, the US dollar index is expected to increase over the short term, which will force base metals to lower further to search support.

The mixed US housing data for January exerted a limited impact on base metals market, but re-ignited market worries over further introduction of China's property curbs greatly hurt futures markets. China's State Council stressed controls on the purchase of residential housing for investment purposes on February 20. However, there is still possibility that the Chinese government may launch new policies in March's meeting.

From technical indicators, both LME and SHFE copper prices have slipped below their 60-day moving average. Furthermore, Shanghai #1 copper discounts remain high at RMB 180-280/mt as post-holiday buying from top consumer China remains subdued.

Taken together, this round of price plunges were caused by market concerns over tightening liquidity in the US, but there is still a long period prior to the exit of QE3 measures. The US will report CPI data for January and jobless claims for last week on February 21 evening, and based on current consumption data, the Fed at least does not have the worry over finishing easing measures owing to inflation pressures. However, the US housing market is not likely to turn around immediately as real recovery in the economy still takes time.