Copper again set the tone for much of the trading during the report period July 24-28 and looks set to sustain its position of dominance. The stronger copper price seemed only to affect zinc, which broke resistance levels at US$1,170 per tonne; both nickel and aluminum failed to put in a strong performance and lost ground.
Data showing that gross domestic product in the U.S. had increased 5.2% in the second quarter (more than 1.5% above market expectations) caused some alarm in U.S. markets. The news also dampened trading sentiment, casting doubt on forecasts of a soft landing for the American economy. However, with a far stronger Euro economy and positive indications that Asian economies are beginning to strengthen, the American factor has lost some of its potency. A crash-landing for the U.S. economy would, of course, be problematic insofaras it would affect the global economy. But any further tightening by the Federal Reserve would be occurring at a time when the Euro economy is stronger than it has been for many years and when improvements in Asian demand prospects are also lending support.
In London, following the July 21 rally,
Trading on July 28 briefly took prices away from their consolidatory phase as the market pushed higher. Talk emerged of considerable stops lurking just above US$1,890 per tonne, but when these failed to materialize, prices began retracing their steps somewhat. Rather than stop buying at higher levels in New York, prices only met with profit-taking, and the attempt at US$1,900 per tonne was short lived. The close on July 28 came in slightly below that of July 24, and the market will need a close above US$1,880 to signify the next upward shift.
The attempt to break US$1,900 was only postponed — not cancelled. For the market, which will continue to eye resistance at US$1,900 per lb., this could be the first of several attempts to shift upwards into the US$2,000 territory. Supported by firm fundamentals and underpinned by strong volumes during the usually quiet summer, copper would appear to have a promising future, at least in the short term, and tests of downside support look unlikely.
Stocks figures indicate a continuation of the current downtrend, with London Metal Exchange stocks ending the report period down 14,300 tonnes, at 496,925 tonnes. The last time stocks fell below the 500,000 level was in November 1998, and, with LME cancelled warrants hitting the 83,000 mark for the first time in three weeks, stocks withdrawals show little sign of diminishing. Consumption growth of around 6% in the first half of 2000 may not be equaled in the second half. However, with the global economy still on firm ground, a strong third and fourth quarter are expected to add to copper’s robust fundamental undercurrent.
News of stronger production also reached the market, though it appears not to have damaged confidence: witness the news that Chile showed a 1.1% year-on-year increase for June, or the announcement that rolled copper product from Japan was up 9.9% year-on-year in the first half. These increases reflect growing domestic demand for information technology. The figures coincide with data showing a fall in Japanese copper exports of 11% in the first half, and a 2% drop in copper wire and cable orders during the same period.
Prices remain frustratingly stuck between a rock (with selling by lower-cost producers in the US$1,580-1,600-per-tonne range) and a hard place (consumer-buying and fund interest of around US$1,570-1,580 per tonne). Underscoring the prevailing bullishness is that fact that longs have consistently refused opportunities to liquidate when prices have reached the higher level of their trading range.
It has been seven weeks since U.S. smelters cut back on production, causing prices to shift upwards. It is also the seventh week prices have been hovering, unable to breach resistance at US$1,600 per tonne. Underlying fundamentals suggest that US$1,600 will be broken, and the retention of long positions suggests that the markets believe this too.
LME stock levels fell broadly in line with recent patterns, ending the report period down 13,150 tonnes at 468,075 tonnes. Cancelled warrant data came in at its highest level in six weeks, suggesting that LME withdrawals will continue throughout the summer. This, together with a strong demand outlook and the reduction in U.S. smelter capacity, suggest that prices will not remain below US$1,600 per tonne for long.
Stock levels fell at a steady pace, shedding 6,800 tonnes from the previous report period and coming within 6,000 tonnes of moving below 200,000 tonnes. February 1992 is the last time stocks reached these low levels, and the trend is giving momentum to any upside movements. Although production is forecast to grow over the coming years, prices in the remainder of 2000 should be able to hold on to a more bullish sentiment and achieve higher levels on the back of low stocks and greater fund interest.
With zinc stock drawdowns still strong, we expect the second half of the year to show greater potential for zinc prices than the first half. The transitional period between the third and fourth quarters is traditionally a secure period for demand, and, coupled with lowering stock levels, physical tightness will feed its way into market prices.
A rise in LME warehouse stocks and mixed expectations over the outcome of Falconbridge’s labour negotiations in Sudbury, Ont., proved bad news for
Heavy fund selling was triggered as stops came in to play and stale longs liquidated to put downward pressure not only on prices but on sentiment as well. Talks at Falco’s operations were in progress as we went to press. In the event the talks fail and strike action goes ahead, it is unlikely that prices will recover to the levels seen earlier this year. The speculative buying that entered the market then would be hesitant to do so now, as the fundamentals of the nickel market are beginning to look weaker. On the other hand, a successful conclusion to the talks would not see the US$2,000 selloff seen at the end of May but could bring prices down to the US$7,000-per-tonne level.
The prospects for gold are looking increasingly poor. Levels of open interest are extremely low, and little possibility of any upside potential exists. On the other hand, if one of the major funds were to buy gold, this would prompt shorts to cover their positions, resulting in a short-lived spike. This happened in May, though, as we saw then, such a development really has little, if any, significant effect on prices.
Data from the Commodity Futures Trading Commission in New York, N.Y., show a liquidation of longs for the report period (up to July 25), and this is in line with price movements for the period. The figures also show that open interest in the gold market is at historically low levels. These data, combined with the fact that most of the long positions taken in May have liquidated, suggest that prices will continue to drift steadily downwards.
— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.
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