Sideways-trading takes hold

Although several positive fundamental factors emerged from the U.S. during the report period April 23-27, these were offset by negative ones worldwide, such as weakening fundamentals in the Asian region (particularly Japan) and less-than-encouraging gains in aluminum prices.

The result was a week of sideways-trading, in which prices established a US$20-per-ton range. On either side of this range, however, two points are worth noting. One is that support has been reinforced at US$1,680 per tonne, where prices have formed a solid base from which an anticipated recovery could take place. On the other side of the coin, resistance has intensified at US$1,700 per tonne, which poses a formidable hurdle for prices. Faced with the pros and cons of the current economic environment, the market can be expected either to lose its nerve over a mixed bag of fundamental news and breaking support, or act on a firmer technical picture and break resistance. We believe that, on balance, fortune will favour the latter (albeit mildly), allowing for a move higher above US$1,700 per tonne.

The aluminum market began the report period with what seemed like upside potential, though this soon was thwarted. Prices at presstime were at least above US$1,540 per tonne, and we remain convinced that, in terms of underlying supply-side fundamentals and overall market sentiment, aluminum remains well-placed to break through the malaise that has characterized base metals in April.

Although the market remains heavily influenced by demand-side factors, there are signs that this nervousness is starting to ease. Stronger-than-expected auto sales and production data from the U.S. during the first quarter support the view that, as far as the economic slow down goes, this might be as bad as it gets. Reports of growth in the gross domestic product (GDP) in the quarter confounded even optimistic expectations by registering a year-on-year increase of 2%. Example: we had forecast growth to remain at 1% on a annualized basis, the same as in the previous quarter. Evidently, the world’s largest economy remans capable of delivering surprises based on its consumer spending power.

Zinc prices remain on a downtrend and threaten to test support levels not visited since mid-1999, when prices dipped to a low of US$963 per tonne. Despite threatening an upside break of the month-long trading range of US$980-990 per tonne in the middle of the report period, price moves were beaten back on three fronts:

– firm resistance;

– an absence of follow-through buying; and

– lack of support from a base metals complex that, once again, failed to shift out of established trading ranges.

The result was a weak close on April 27 below the technical area of support at US$980 per tonne, which has left prices looking increasingly vulnerable to moves lower.

Despite an economic environment that has grown in confidence over the past seven days, the supply-demand fundamentals of zinc remain weak, and the downside risks, considerable. With sentiment already damaged, the latest report from the International Lead and Zinc Study Group suggests that sentiment will weaken further and remain week throughout the year. The study group forecasts a global surplus of refined zinc in 2001 in spite of the significant production cuts announced by Cominco at its plant in Trail, B.C. With global mine production forecast to increase by 4.2%, year-over-year, to 9 million tonnes and refined production slated to rise by 4.6% to 9.3 million tonnes, while consumption remains virtually flat, the forecast is not exactly supportive.

Nickel prices again proved their resilience in the face of a base metals complex that failed to live up to its full potential. The result of another week of sideways-trading is that prices appear to have formed the most solid base of technical support since the lower US$6,000-per-tonne level reported in March.

Conditions in the gold market remain unchanged. Prices moved in a narrow but steady trading range of US$262-264 per oz. and have yet to reflect the true level of nervousness that has developed in the bullion market. Gold prices continue to be supported by several factors: a large fund short position on the Comex division of the New York Mercantile Exchange; weakness in the U.S. dollar; an upward trend that has been in place for the past month; and continued volatility in lending.

There are doubts, however, over the sustainability of these factors and their ability to provide permanent support. Indeed, the relative strength of the U.S. data over eurozone figures calls into question the view that the recent strength of the euro over the greenback can be sustained. The recent GDP report inflicted serious damage on the euro by reversing the gains it had made over the previous one and a half weeks, leaving it in a technically vulnerable position.

— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.