A sense of optimism returned to the base metals complex between Jan. 8 and 12, as all the major metals ended the period strongly higher with firm bases of support. Copper prices gained 0.5% over the week; nickel improved by 1.3%; while zinc tacked on 0.9%. The strongest performer was aluminum, prices for which gained 2.2% on the week following a series of strong closes. Several factors combined to nurture the more positive mood after the first two weeks of the year weakened prices and depressed sentiment. Tightening spreads, particularly in aluminum and nickel, caused much of the movement, with the approach of the third Wednesday (Jan. 17) adding further pressure to the tightness. Unusually, however, the move to higher trading ranges was not steered by the complex’s usual drivers of copper prices and U.S. economic data, while, in the gold market, the weaker U.S. dollar failed to lead prices higher. Copper was, in fact, left to follow the moves upward, in sympathy with aluminum and nickel.
The crisis of confidence experienced by many following the release of weaker U.S. data in the new year is beginning to clear. Also, the quietly confident euro economy is delivering more support to prices than ever before. A comparison of data from the two economies is encouraging for the eurozone, and there are signs that this could start to affect metals prices. The improved sentiment could also serve to offset the U.S. slack during the first half of the year. In other words, the positive eurozone data may not exactly make a new leader, but it could make a good caretaker manager during the interim period.
Although copper prices staged a steady recovery from recent lows, the moves that took place were hesitant and did not reflect concerted buying. By Friday, Jan. 12, firm buying had provided a secure level of support on the downside, while stubborn resistance between US$1,795 and US$1,800 per tonne prevented a definitive upward move which would have seen prices aiming for US$1,840 per tonne. As a result, copper prices remained wedged between a rock and a hard place to form a narrow trading range — too narrow to be sustained for long. Indeed, at the time of writing, on the morning of Jan. 15, prices had broken through US$1,800 per tonne.
The post-Christmas gloom that descended on the U.S. economy, which is now widely thought to have been overplayed, has been replaced with a more rational, upbeat sentiment. The impact on metals prices is becoming evident as their fundamentals come into view and firm base levels of support are illustrated on the charts.
Recently, the International Copper Study Group reported that the January-to-October period of 2000 registered a deficit of 459,000 tonnes as demand outpaced production — all of which supports the fundamentally sound platform on which copper prices currently rest. However, until these positive signs give rise to a feel-good sentiment, a reliable recovery for copper will remain elusive as technical resistances lead to further stalled rallies and disappointed long liquidation.
Aluminum prices performed strongly during the report period, following a US$50-per-tonne price rise on Monday, Jan. 8. The rise was triggered by Alcoa’s announcement that it would be cutting back on production at its Wenatchee and Ferndale smelters in the northwestern U.S. Prices have since been able to retain their gains and form the most solid trading range since mid-December of last year.
Supported by further tightening in the nearby spreads, technically stronger charts and renewed strength in the EUR prices were able to take the initiative without needing to be triggered by the activity in copper. However, chances of further gains rest firmly with the market’s focus; pre-occupation with the demand side would hamper price developments, whereas a broader view, incorporating the 750,000-tonne-per-year production loss in the U.S., could see prices become more rigorous. Given the current nature of market behaviour and sensitivity, as weak data from the U.S. continue to be digested, our suspicion is that attempts to move to the upside will face stiff resistance from producer selling and profit-taking.
November 2000 stock data of unwrought aluminum shows a month-over-month fall of 54,000 tonnes and a year-over-year decline of 49,000 tonnes, and there is further evidence of strong Chinese demand, with imports in the 11 months to November rising 63.4%, year over year, to 530,811 tonnes.
Nickel prices surpassed expectations by breaking out of their trading range to end the report period more than US$500 per tonne higher, following a succession of increasingly firm closes and the highest closing price, on Jan. 12, since mid-December. The positive price behaviour led to an improving sentiment across the base metals complex and the most encouraging price moves in weeks.
Fundamentally, of course, the outlook for nickel remains unchanged, as the recent move higher was largely chart-driven. A series of moves through resistance levels led to buy-stops being triggered, adding further momentum. Short-covering by the funds provided the necessary impetus to push prices higher on Jan. 12 before selling removed some of the heat.
The question now is, Will nickel be able to maintain its gains? Stops triggered by funds and commodity trading advisors are useful in breaking through specific price resistances, though they, in themselves, do not strengthen the metals outlook. London Metal Exchange (LME) stock levels remain comfortably below 10,000 tonnes, having fallen 408 tonnes in the report period, and, with cancelled warrant data also remaining firm, indications are that the stock falls will continue. Further falls would strengthen nickel’s position, though resistances should remain firm. Nickel will likely have to struggle to overcome the next fundamental and technical hurdles. We expect a trading range of US$6,800-7,000 per tonne to emerge, enabling consolidation.
Zinc‘s reluctance to reflect the general improvement in the rest of the base metals weakened on Jan. 12, as prices broke out of their low trading range of the past 18 months. On the back of firmer base metals prices overall and improved confidence, zinc moved convincingly away from the US$1,030-per-tonne support area. However, zinc’s ability to build on its recent gains will depend on copper and aluminum, as speculative funds, doubtful that zinc can maintain the high ground, continue to leave prices vulnerable and at the mercy of the sentiment that prevails in the overall base metals complex.
Despite this cautiousness, zinc’s sharp move higher was encouraging. The test, however, is not so much zinc’s ability to make gains as its ability to retain them when sentiment starts to slacken. One problem zinc faces is the lack of established trading ranges. Its price falls during the final quarter of 2000 year were invariably too sudden for ranges to emerge, leaving prices in a technical no man’s land and without support if selling emerges.
Despite the risks on the downside, we believe that the selloff after Christmas was overdone. At current levels, zinc remains fundamentally undervalued, and upside potential exists.
Gold prices ended a disappointing week on Jan. 12, trading in a US$263-265-per-oz. range and looking for support at US$264 per oz. Trading in the Jan. 2-5 period set a pessimistic tone for the days that followed, and we do not expect prices to make up the losses. It was platinum group metals that continued to capture the headlines, with platinum rising to a 13-year high and palladium breaking through US$1,000 per oz. to reach fresh record highs of US$1,095 per oz. Even silver managed a short covering rally.
The situation in the bullion market was markedly different, as prices set a gloomier tone. The morning fix on Friday, Jan. 12 dropped to US$263.65 per oz. — the lowest since Sept. 22, 1999 — and, with increasing signs of more active producer hedging, the direction prices were taking became clear. Speculative funds were comfortable going short, causing prices to test the lows reached in late October 2000, when gold first broke long-term support at US$270 per oz.
The gold price chart also weakened, acting as a catalyst for the price fall as the 10-day moving average slipped sharply below the 30-day moving average. Thereafter, the technical charts look weaker still, and there appears to be little chance of a gradual narrowing in the gap between current prices and the lows reached in 1999.
An interesting feature of the current gold market is the breakdown of its relationship with the U.S. dollar. Despite the continued weakness of the greenback, gold prices have failed to benefit; indeed, prices against the inverted U.S. dollar have moved in a divergent direction. Weaker currencies in Asia provide some explanation for this, as does the timing of the next Bank of England auction, on Jan. 23. The overriding reasons are lack of capital market interest and a growing consensus that the lows of 1999 will be tested further during the first half of this year.
— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.
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