Aluminum buoys copper, zinc

The influence of nickel prices on other base metals has been eclipsed by that of aluminum.

Aluminum prices gained more than US$100 per tonne in just two trading days during the report period June 12-16 as Kaiser announced power-price-related cutbacks at two of its U.S. smelters. Aluminum’s rise pulled copper and zinc prices up as well, though nickel prices failed to benefit and, instead, trended even lower than in the previous report period.

Some consolidation now looks likely, with the possibility of a fresh test of the upside in aluminum, copper and, later on, zinc.

Kaiser’s cutbacks, along with those already announced by Vanalco and Ormet, could reduce U.S. output by around 80,000 tonnes in the third quarter. However, the alumina is likely to be sold elsewhere, so any improvement in market fundamentals is likely to be temporary, and most of the off-line capacity is likely to resume once high power prices recede, following the peak summer demand period. Nevertheless, the move has certainly helped improve market sentiment on the London Metal Exchange (LME).

Pressure from commodity trading advisors on June 12 pushed down copper prices to test support at US$1,720 per tonne. Fund activity pushed up the price even further to convincingly break through resistance at US$1,800 per tonne, reaching a high for the week US$1,825 on June 16 — the highest since late May.

LME copper stocks continued to fall, declining by 11,125 tonnes, though an increase of 4,900 tonnes in Shanghai stocks partially offset the fall.

Prices leapt during overnight trading on June 14 and early trading on June 15, recovering from the low, on June 13, of US$1,449 per tonne to reach a high on June 15 of US$1,574 — a level not seen since late March. Trading on June 16 saw prices dip only briefly below the previous day’s close, to reach a high for the day — and the week — of US$1,587 per tonne. Commodity trading advisors continued to influence the direction of prices, as any producer selling was immediately bought up by aggressive fund buying.

News from Kaiser that production cuts of 128,000 tonnes were to occur at two if its aluminum smelters, owing to a tripling of electricity prices in Washington state. Kaiser plans to close its 65,000-tonne-per-year Tacoma smelter completely and slash annual output at its Mead smelter by 63,000 tonnes.

LME stocks continued to fall, ending the report period down 17,875 tonnes.

Nickel prices struggled — and failed — to stay above the US$8,000-per-tonne support level. A weak close on June 12 of US$7,870 per tonne set the tone for the rest of the report period, with prices trading narrowly above and below US$8,000.

Nickel closed poorly on June 15 at US$8,170 per tonne, and a poor performance the following day pushed prices back down to close weakly at US$7,865 — the bottom end of the day’s trading range and the lowest close since late November 1999.

Benefiting from aluminum’s rally, zinc prices performed well, regaining some of the losses incurred during the previous two weeks. Prices reached a high of US$1,148 per tonne on June 16 — a high for the month — and closed the week in London at US$1,444.

LME stocks continued their decline, falling by 5,100 tonnes, to 232,500 tonnes. Signs of tightness in the physical market began to emerge as premiums for European zinc edged upwards in Asia. Stocks in Singapore continued to fall, reaching 900 tonnes on June 13, compared with 13,100 tonnes in early March — all of which prompted the rise in premiums. The falling stocks also reflect the recent overall tightening in the zinc market.

Zinc prices could potentially build on recent gains, especially if commodity trading advisors exert strong influence and funds move in. Zinc currently seems undervalued and has been an under-performer for too long for prices to remain at their present level. A strong rally, driven by fund activity, could soon see prices attempt to break resistance at US$1,160, US$1,180 and ultimately US$1,200 per tonne.

June 16 saw a quieter end to a volatile week in the gold market, which saw prices move from a close on June 13 of US$285 per oz. to a follow-day close of US$291.5 — the highest since late February.

Prices are being directed by limited movements and driven by few, albeit large, funds. The activity of these funds has contributed significantly to recent volatility and is a more credible explanation of recent price movements than any significant improvement in fundamentals.

Volatility in foreign exchange markets is the other reason given for gold’s improvement, though we remain doubtful. One fund can push prices up, and, just as easily, another can bring them down by going short. On that basis, we believe gold prices will begin to ratchet downwards.

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