Consolidation prevails on LME

The report period June 19-23 was one of consolidation for the major metals on the London Metal Exchange (LME).

Copper and aluminum briefly challenged overhead resistance mid-week, but, despite more large LME stock declines and a large jump in cancelled warrants for both copper and nickel, there was no follow-through buying. The poor closes on June 23 indicate there may be further price weakness in the short term.

The Euro gave up some of its recent gains, breaking below support at US$0.95. This is discouraging European consumers from buying metal and is therefore a key reason why LME prices have failed to make further progress. There was no single reason to explain the weakness in the Euro, though surveys suggest investors are still long. Over the next month or so, we expect the Euro to trade in the range of US$0.90-0.95.

Copper spent most of the week attempting to overcome resistance above US$1,800 per tonne but fell back on June 23 as disappointed longs liquidated. A sharp increase in cancelled warrants in the second half of the week to more than 100,000 tonnes was accompanied by a slight tightening in nearby spreads, and both these factors could encourage further tests of the upside in the days ahead.

Recent data from the Commodity Futures Trading Commission regarding the net positions of speculators on the Comex show that momentum-trading funds added to their long positions during the rally that took copper prices from the low US$1,700-per-tonne region up to US$1,800. Working on the basis that some of these long positions were liquidated as a result of copper’s failure to break through US$1,800 per tonne, the “funds” are probably neutral and may again turn buyers as copper slips back to support at US$1,750-1,760 per tonne.

Notable features of copper’s price action in the report period were a tightening in nearby spreads, pushing up the front end of the copper price curve, and a widening of the backwardation further forward. This has resulted in a steepening of the copper forward curve. In some quarters, this is attributed to producer-selling, though we do not believe this to be the case. Indeed, the steeper forward curve is likely an attempt to discourage producer-selling, reducing, in the short term, one obstacle to higher prices.

Although there appears to be an opportunity for copper prices to rally in the short term, we believe fundamentals are likely to weaken in the second half of the year as the global market moves into surplus (compared with a deficit in the first half). Over the next six months, we expect a range for the LME cash price of US$1,500-1,850 per tonne.

Japanese wire and cable orders showed a dramatic 7.8% year-on-year improvement in May. The fact that W&C orders have risen during the past four consecutive months suggests that the Japanese construction sector may at last be bottoming out. W&C accounts for 70% of copper demand in Japan.

Following the previous week’s spectacular gains, aluminum prices traded in a narrow range of US$1,550-1,590 per tonne early in the report period, falling back on June 22 and 23 on disappointed long liquidation as prices failed to break higher.

At present, there are several positive factors which suggest prices could break through the upside of this range. Chief among these are the rapid withdrawal of LME stocks (minus 19,525 tonnes in the report period under review) and fears of a squeeze developing in September (some tightness is evident in LME forward prices). Set against these factors are the current high level of global output (the latest production figures show that output in May was up 3.3% year-on-year) and the likelihood that, even with smelter cutbacks, the market is heading for balance in the second half of the year as U.S. demand slows.

LME 3-month nickel fell to an 8-month low of US$7,550 per tonne on June 20. Several factors — a weak technical picture; news that Toronto-based Falconbridge is optimistic about its labour talks; the imminent resumption of shipments from Noril’sk in northern Russia; and growing signs that stainless steel demand is slowing — all contributed to weaker sentiment. Nearby spreads also contracted, causing the cash-to-3-month spread to fall to US$120 per tonne at one stage. However, the nickel market remains nervous and, in thin volumes, the cash-to-3-month backwardation was bid back out to US$190-240 per tonne later in the report period, contributing to the stabilization in the 3-month price to US$7,550-7,830 per tonne.

The recovery in the backwardation shows that although many market participants are expecting the nickel market to move into a better balance between supply and demand in the second half of the year (following a market deficit of around 25,000 tonnes in the first half), there is little sign that this is happening as of yet.

LME stocks continued to fall steadily, and the recent jump in cancelled warrants from 2,970 tonnes on June 19 to 6,060 tonnes on June 23 suggests that the rate of stock withdrawal could soon accelerate from an average level, so far in June, of 70 tonnes per day. There are now only 15,066 tonnes of metal left on warrant in LME warehouses.

Zinc prices saw lively trading and, in the process, experienced mixed fortunes. Following a strong close at the end of the previous report period, on June 16, when prices closed at the day’s high of US$1,147 per tonne, it seemed likely that a test of the US$1,150-per-tonne resistance level was in store. A strong start to the week saw prices on June 19 edge above US$1,150 to close near the day’s high at US$1,153 per tonne — a rise that failed to maintain any momentum on June 20 as a generally weak base metals market combined with some profit-taking to push prices firmly back below the level of resistance.

The announcement on June 21 by Metaleurop that it was to end production at its Harzer plant in Harlingerode, Germany, briefly pushed prices up to US$1,153 per tonne on the following day, but they again failed to break resistance at higher levels. Thin trading by the end of week delivered calmer conditions as prices closed in London marginally below the 100-day moving average at US$1,138 per tonne.

LME stocks, lately a constant source of positive news for zinc, wobbled slightly as they registered a rise, over two consecutive days, of 1,575 tonnes — the first such rise since mid-February. Zinc premiums also came off a little in Asia, as the physical market showed further signs of its relaxed approach to current stock levels. Stocks still ended the week 1,800 tonnes down at 230,700 tonnes, though the decline, which has averaged around 3,000 tonnes per week, now appears to slowing. As we enter the traditional summer downturn in consumption, such a slow-down is bound to occur. However, we will enter the upturn in demand at the end of the summer with still-historically-low stock levels and a tight physical market. In recent years, zinc demand has peaked in the fourth quarter — a peak that would leave consumers feeling less relaxed about the state of the physical market this year.

Following the previous week’s high points, gold had a more subdued time as prices largely traded within a narrow range of US$285-287 per oz. from which they broke out only briefly, on June 22, to reach a high of US$289.10 before falling back to close at US$285.30 per oz. This short-covering rally was the only event that provided any real movement for prices, which spent the rest of the week struggling to stay above the support level of US$285 per oz. as poor physical demand also failed to buoy up prices.

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

Guardian Enterprises (gud-v) has changed its name to Interactive Enterprises (itv-v) on a 1-new-for-5-old-share basis.