Metals prices traded in buoyant fashion for most of the report period Jan. 21-25, feeding off unexpectedly good economic data and strong technical indicators. Weakness crept in late on Jan. 25, pushing most of the London Metal Exchange (LME) complex, except copper, back down to recent support levels. These are likely to undergo a thorough testing in the days ahead, which promises to be a real test of nerves for the long term.
We, like most analysts, have struggled to justify the strength of base metals prices since the beginning of the year. There has been little change in underlying market fundamentals, premiums have stayed depressed and LME stocks have continued to rise. The bright spot in all this has been an improvement in U.S. leading indicators that has surpassed even the most optimistic expectations. Positive comments from Federal Reserve Board Chairman Alan Greenspan have contributed to a growing feeling that the U.S. economy is about to regain its upward momentum. Under these conditions it is perhaps not surprising that fund buying of metals has proved much more resilient than we first expected. However, on Jan. 25, there were signs in the late sell-off in aluminum, nickel, zinc and lead that some longs may be starting to lose their nerve. Without consumer interest, current base metals price levels appear fragile. The week of Jan. 28-Feb. 1 will be a key one for U.S. data releases, including the consumer confidence, the Chicago Purchasing Managers, the fourth-quarter gross domestic product, the Michigan Sentiment, etc.). Expectations are now high, and might more easily be disappointed compared with a few weeks ago. If funds do lose their nerve, expect further large downward corrections in the short term.
Copper prices continue to trade in robust fashion, helped by strong U.S. economic indicators, positive comments from Greenspan concerning the U.S. economic recovery, and the likelihood of more mine closures. Persistent fund-buying helped push the LME 3-month figure to within US$13 per tonne of its recent US$1,585-per-tonne peak on Jan. 25 before a retracement to US$1,550 per tonne later on. Most analysts are at a loss to explain copper’s current strength from a fundamental standpoint. Physical demand has yet to pick up following the Christmas break, and stocks are still rising steadily (exchange stocks were up an additional 20,000 tonnes during the report period). Nevertheless, there are persuasive signs of a U.S. economic recovery taking root, and if funds can hold their nerve, consumers may yet emerge to take up the running. If so, the expected retracement to the US$1,450-to-US$1,460-per-tonne level may not materialize.
Anglo American’s announcement that it is preparing to pull out of its investment in Konkola Copper Mines must cast doubt on the viability of its (56,000-tonne) Konkola mine and (162,000-tonne) Nchanga mine. Of the two, Nchanga is the least costly, at US66 per lb. compared with US80 per lb., but neither is likely to attract a buyer at current price levels. Anglo says it will honour its existing funding commitments, but re-nationalization appears to be the most likely way of ensuring survival.
Aluminum prices strengthened over the second half of the report period, pushing through the US$1,400-per-tonne level, but ended the week under pressure, searching for support at US$1,380 per tonne. The LME 3-month price got to within US$35 per tonne of its recent peak, but this was a much more modest performance than that of copper. Rumours of an imminent restart of aluminum smelting capacity in the northwestern U.S. may have dampened sentiment. In the short term, we expect further tests of support at US$1,380, US$1,360 and US$1,350 per tonne.
After falling sharply on Jan. 21, erasing almost all of its new year’s gains, the LME 3-month price for
With zinc already suffering the worst fundamentals of any base metal, the last thing the market needed to hear was Outokumpu saying it was considering restarting its 200,000-tonne-per-year Tara zinc mine in Ireland. Outokumpu says preproduction work could begin by March, with full production envisioned for June. Furthermore, in order to ensure Tara’s long-term viability, Outokumpu could expand annual output to 250,000 tonnes by 2003.
When Tara’s closure was announced in early November 2001, the reasons given were low zinc prices and high production costs. We strain to see what has changed since then. Outokumpu itself admitted that the zinc market remained weak, and this move is unlikely to help. Despite substantial cuts in mine production, smelters remain well-supplied with feed, and metal output is continuing at a high level.
The dip in nickel prices proved to be short-lived, as the fund appetite to increase short exposure appears to have waned. Given the additional tightening in the nearby spreads and both the persistency and size of the current backwardation (around US$170 per tonne), this should not be surprising. Add in the backdrop of a much healthier base metals complex and vastly more encouraging economic figures emerging from the U.S., and the arguments to hold fresh short positions at current levels soon wane. With prices having already adjusted to weak demand fundamentals, the downside risks also begin to ease. Funds operational in this market would have placed short positions at higher price levels and already taken profits. Prices have reached levels that make the risk-to-reward ratio too low to encourage short selling by funds; the question is, Is this the point from which nickel prices can launch a recovery?
Since the new year, nickel has effectively moved in a US$200 trading range between US$5,600 and US$6,000 per tonne. Trading above this level has been brief and unsustainable. Above this level, fund buying would need to be triggered by stops if a break of range were to take place. But can a real recovery be based on fund stops alone? Until this is matched by consumer buying, the upside risks will continue to lack real credence, despite the still-low stock levels and the highest cancelled warrant data since the third quarter of 1999. While this is price-supportive, it does not, in itself, indicate a sustainable break of resistance or a price recovery.
Much of the new-year euphoria in the precious metals markets is now gone, though gold still has some way to fall before this is reflected in prices. Demand indicators remain weak, according to latest data from the Gold Fields Mineral Service, and the technical position has deteriorated significantly. The break of an upward trend line that had been in place since early December 2001 and the fall through the 30- and 100-day moving averages leaves prices exposed to further downside risks. The combination of this fundamental weakness and technical vulnerability suggests that gold prices will be unable to stabilize for long at current levels, and, over the short term, we expect a return to the mid-US$275-per-oz. area.
— The opinions presented are the author’s and do not necessarily represent those of the Barclays group.
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