Copper prices ended the report period Feb. 18-22 by giving up almost all the gains they had made since late January. On Feb. 22, the 30-month price on the London Metal Exchange closed just above the 10-day moving average at US$1,545 per tonne (a good indicator of recent price moves), and that may delay further liquidation. However, with global inventory climbing steadily (by 44,000 tonnes during the week under review), a test of US$1,500 per tonne looks likely soon.
The rise in Shanghai copper stocks marks the continuation of a trend that has seen them increase to the current all-time high of almost 178,000 tonnes from 47,000 tonnes in late October 2001. However, we would caution against interpreting this increase too bearishly. China’s net imports of copper in all forms surged last year, chalking up a new record of 2.6 million tonnes. Net imports of refined copper were particularly strong, having climbed 30% to 784,000 tonnes, and, in addition, local copper production surged 6% to 1.4 million tonnes. However, this extra supply was comfortably absorbed by a 20% increase in domestic consumption, according to CRU International.
Given the strength of copper imports in the fourth quarter of 2001 and continued growth in local refined production (up 13%, year over year, in January), it is hardly surprising that stocks have climbed so rapidly. However, with industrial production growth forecast at around 10% this year and infrastructure spending still at high levels, we expect to see a reverse in the the build-up of copper stocks in China.
LME 3-month aluminum prices continued to find support from forward buyers in the US$1,365-1,370-per-tonne region and proved immune to the selloff that hit copper prices early in the report period. Prices have now moved into a narrow range, with resistance at around US$1,380 per tonne reinforced by both 10- and 30-day moving averages. Price risk remains on the downside.
After a spate of rumours concerning aluminum production restarts, there was mixed news from the supply side of the industry. Date released by the International Aluminium Institute (IAI) showed production falling for the 13th consecutive month in January (down 1.6%, or 28,000 tonnes). However, this was more than offset by a big increase in Chinese production (up 24%, or 62,000 tonnes), which is not included in the IAI figures.
Despite forward-buying interest at US$790 per tonne, the weak close in zinc prices on Feb. 22 reflects the depressed tone of the market. Speculation of a possible restart at the Tara mine in Ireland continues to hang over the market, physical demand remains lamentable, and stocks in LME warehouses have hit the 480,000-tonne level. On top of all this, the rest of the base metals complex remains soft, and prices look set to undergo some long-expected downside correction. With zinc prices having already broken down through all the key moving-average lines, the question for zinc, unlike the other base metals, still seems to be: how low can prices go? While US$780 per tonne is still the next key support area, prices in December 2001 showed they are capable of dipping lower (the LME 3-month price hit US$753 per tonne shortly before Christmas). We still believe the risks for zinc are placed on the downside and expect further dips below US$780 per tonne in the short term.
Against this backdrop, how likely is a restart of Outokumpu’s Tara zinc mine? Outokumpu says the mine will only be opened if profits can be guaranteed. With costs at US44 per lb., prices would have to climb above US$1,000 per tonne by June (when a decision is due). With consumer presence in the market still negligible, we believe such a guarantee is unlikely even in the second half of 2002. Consequently, we doubt that the 200,000-tonne-per-year will reopen this year.
With nickel still able to hold to a range that can be drawn roughly US$200 per tonne above and US$200 below US$6,000 per tonne, prices are continuing to experience a ‘good’ downturn. Prices dipped briefly below US$5,800 per tonne during the report period but were able to gain upward support from several sources. Technical support, initially at US$5,800 per tonne and then at US$5,700 (the 200-day moving average), is one source; another is short-covering, which, in a market still dominated by the thinness of its trading conditions, continues to produce sharp price moves. But with economic data (and, more importantly, forward-looking data) from the U.S. delivering fresh good news, the question becomes: will fundamentals finally act in nickel’s favour and result in higher prices?
The picture is mixed, and it is the conflicting indicators that lead us to expect flat prices in 2002. Nascent upward pressure is emerging: the scrap market is tightening; the stainless steel market’s slump looks to have bottomed out; and the broader macro-economic picture is starting to strengthen. So what could prevent a recovery to US$7,000-8,000 per tonne this year? Supply fundamentals aside, one reason is that LME prices have already covered a lot of ground from their brief trough at US$4,400 per tonne in November 2001. And while steel demand indicators may be reluctantly starting to point up, inventory concerns are still far from consumers’ minds, distorting the link between improved demand and price improvements, and ultimately acting as a drag on upward price moves in nickel.
What conclusions can be drawn from recent developments in the gold market? After receiving a wholly unexpected stab in the back from the Bundesbank, prices were able, with remarkable efficiency, to stem the flow of blood at around US$290 per oz. The presence of the 30-day moving average was one tenet of support, but, more importantly, the solid trendline from the Sept. 11 rally also lies in this area. The technical support this has provided would be considered good under any circumstances, but, considered in conjunction with a speculative market holding the largest net long position since 1996, it is close to astounding. With the Bundesbank having now stated clearly its intentions, investors are wondering how the anti-hedging, Japanese investor nervousness and strong gold equity arguments weigh up against this powerful negative.
At the same time that most arguments were beginning to turn bullish, the world’s second-largest holder of bullion was sharpening its knife. Although the expected price cull has not yet materialized, it’s clear the professional market remains on a heightened state of alert. While it’s true that any German sales would have to abide by the self-imposed 400-tonne-per-year sales limit, this counter-argument rings a little hollow. Our figures suggest that even if sales did begin before 2004, there would be only a small window of opportunity of around 50 tonnes. But in a market where sentiment can count for more than fundamentals, the size, nature or precise timing of any sales diminishes in importance.
Steering the decision of long speculative funds right now is a mixed sense of uncertainty and herd mentality — a docile mixture while prices remain range-bound in quiet volumes but potentially potent if support toward US$290 per oz. begins to crack as sell-stops are triggered and waves of fund liquidation follow. If funds are looking for direction, chances are that they will find it on the downside. With uncertainty prevailing and technicals moving into unsold territory, the price stability has not been surprising. Data soon to be released by the Commodity Futures Trading Commission are expected to show that a significant net long position is still in place, and, unless the Bundesbank factor can be further discounted and fresh buying enters the market, the price-risk scales will slowly begin to tip toward the downside.
— The opinions presented are the author’s and do not necessarily represent those of the Barclays group.
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