Red metal moves on up

Metal prices delved into a bag of mixed fortunes during the report period July 17-21 as copper led the way in breaking its range to reach US$1,870 per tonne following several failed attempts to overcome resistance at US$1,800. During the first part of the week, aluminum, too, looked as though it would follow copper’s example and break through US$1,600 per tonne and approach the US$1,620-per-tonne resistance level. However, lack of follow-through momentum, coupled with sustained producer-selling once prices were through US$1,600, pushed the price down to the US$1,580-1,600 range. Zinc reacted belatedly to the rallies, breaking upward resistance on July 19 to trade, at presstime, in the US$1,160-1,170 range. Nickel remains the weakest of the group and is struggling to hold at US$8,000 per tonne.

Meanwhile, the general response to copper’s price rise has so far been muted. Fundamentals continue to favour the upside, and economic indicators from the U.S. support the view that the economy is slowing at a sufficient pace to soften inflationary growth and thus prevent a crash landing. Stocks continue to fall, and, in aluminum, there is no sign of any re-starts in the U.S. Precedent shows that when prices display a slow reaction to a rally in one metal, any delay in response makes a shift upwards all the more pronounced when the base metals complex finally does make a reaction. Therefore if copper prices consolidate and continue to eye higher levels, the base metals complex will likely show a similar reaction.

After a month-long attempt to break resistance at US$1,800 per tonne, copper finally advanced to trade in the US$1,820-1,850 range, finding strong support on the downside first at US$1,820 per tonne and then higher in the range at US$1,830. By mid-week, once prices had been established at a higher level, copper began moving up through the range to break resistance on the upside at US$1,850 per tonne.

London Metal Exchange (LME) stock withdrawals continued their downward trend, ending the report period down 13,700 tonnes. Stocks are now at their lowest since November 1998 and continue to underpin copper’s move into more bullish territory. The charts show a tendency for copper prices to trade in (increasingly smaller) triangular ranges before breaking out to test upside resistance. Although, from a technical aspect, prices could well approach US$1,950 per tonne, several factors — producer selling, the “Chinese factor” and the perceived progress of the U.S. economy — all weigh on the downside and could see prices consolidate further before testing the next resistance levels.

Recent data from the U.S. show that housing starts in March fell 2.6%, taking new starts down to an annual rate of 1.5 million units. Although construction is the single most important end-use for copper, the fall brings some relief to the market as it indicates a soft landing for the U.S. economy in response to higher interest rates.

Chinese copper stocks showed evidence of further rises. On the basis of contained copper, net imports in all forms are running 55% above last year. This will significantly reduce copper imports during the second half of 2000 and lead to a slowing of LME stock withdrawals.

Aluminum remains in the US$1,580-1,600-per-tonne trading range following failed attempts to beat resistance, first at US$1,600 then US$1,620. Prices during the report period never managed to hold on to the US$1,600-1,620 range in the face of heavy producer selling. Prices briefly reached US$1,620 per tonne on July 18 but closed down in London on June 21 at US$1,589 per tonne.

Strong support exists for aluminum between US$1,580 and US$1,600 per tonne. When prices dip much below US$1,600, fund interest enters the market, and when they rebound on this to move above US$1,600, profit-taking from intra-day trading and trade-selling places a cap on prices to provide insurmountable resistance.

Declining stocks in LME warehouses (stocks ended the period down 10,500 tonnes) and reasonably healthy demand figures also provide strength to the aluminum market. Cancelled-warrant data remain low, indicating smaller stock withdrawals to come, but the summer season accounts for much of this. However, cutbacks in the U.S. due to soaring power prices still possess the ability to tighten supply severely in early 2001, especially if off-lined capacity is not re-started next year. Even if U.S. demand does drop off, a fall in production levels at a time of low stocks would be enough to provide support for prices and prevent further falls.

Zinc prices finally emerged from two weeks of quiet trading and broke out of their US$1,130-1,150-per-tonne trading range. Price rises earlier in the week in copper and aluminum failed to influence zinc’s direction until July 19, when a belated response to their rise brought in short covering and stop buys at US$1,150 per tonne. The close on July 19, above the 200-day moving average and above the US$1,160-per-tonne resistance level, provided strength for prices for the remainder of the week. Prices closed in London on July 21 at US$1,162 per tonne.

LME zinc stocks continued to fall, ending the report period down 4,500 tonnes — still in line with stock declines this year, which have averaged around 5,000 tonnes. Cancelled-warrant data continue to be firm, indicating further withdrawals in the weeks ahead.

Zinc, like copper, continues to see firm demand amid falling stocks and a tightening physical market. With new zinc projects coming on-stream, the longer-term outlook for supply looks brighter than at present. Higher prices also result in fewer price-induced closures, adding to overall output. Therefore, despite stocks being at their lowest level since 1992, new production coming on-stream is removing some physical tightness.

For now, sentiment has improved. After being range-bound at a time when other metals were enjoying rallies, zinc has moved to a higher level of US$1,160-1,170 per tonne. It now needs to consolidate at this range before moving any higher or it runs the risk of looking overbought, at which point prices would suffer from a correction and face pressure from producer selling and profit-taking.

Nickel prices put in a poor performance, following the knock they recently took as a result of labour rumblings at Falconbridge’s operations in Sudbury, Ont. At the start of the report period, prices managed to claw their way back up to levels above US$8,000 per tonne and closed on July 19 at the day’s high of US$8,130. Fairly thin volumes, however, make the chart look exaggerated, and the move up did not represent a significant shift. Some short-covering was met with long liquidation, and prices trended downwards toward the end of the week to close on July 21 below US$8,000, at US$7,980 per tonne (under the 10-day moving average).

Also, the daily stocks figures on the morning of July 21 dented nickel sentiment and dictated the tone of trading for the rest of the day. Prices currently look pretty wedged. During the report period, when prices hit US$8,000 per tonne, this triggered sell-stops and needed trade buying at around US$7,900 for support.

Uncertainty surrounding the final outcome of Falconbridge’s labour talks at Sudbury continues to overhang the market. Falco’s chief executive officer, Oyvind Hushovd, has given no guarantee of a successful conclusion to ongoing talks. The contract for around 1,200 unionized workers expires Aug. 1, and the “substantial changes” Falconbridge proposes to make are proving to be a sticking point between unions and the company.

Failure to bring the talks to a mutually satisfactory conclusion would lead to strike action by the unions involved and, from a market perspective, feed some new upside momentum into prices. Nickel supply remains a key factor in determining market sentiment, as the stock rise on July 21 showed. However, the strike issue is beginning to lose much as its potency: as new production comes on-stream and world demand wanes, the physical market becomes increasingly easy about the supply situation. The recent easing of the backwardation in nickel displays this, and data last week from the International Nickel Study Group confirm that nickel production has moved above consumption.

Gold prices presented few surprises as they hovered around US$280 per oz. Selling on July 19 pushed prices down more heavily to a low of US$277.3 per oz., but prices toward the end of the report period managed to recover some lost ground and headed back up to close, in London on July 21, of US$280.1 per oz.

The US$280-per-oz. level emerged as a key benchmark for gold prices. Above it, gold finds a support level firmed up by physical buying. When prices dip below it, as they did during the period under review, gold meets resistance on the upside. The test for prices now is whether US$280 is firmer as a level of support to prevent downside movements or as a level of resistance.

According to data from the Commodity Futures Trading Commission, futures and options underwent a net shift in fund activity between mid-June and mid-July, as commodity trading advisors and speculators switched to take long positions in gold. Since these were taken out, however, gold prices have returned to tests of the downside, and any move below US$280 per oz., should it fail to hold prices firm, would leave gold vulnerable to a heavier selloff as the recently taken-out long positions went short. Under this scenario, prices would be taken back down to the US$273-275-per-oz. trading range.

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