During the report period May 21-25, the major metals traded on the London Metal Exchange (LME) held onto gains that had been made in the previous week. In terms of cash price performance, copper was the strongest performer, as reflected in a 3% gain on the weekly average price. Elsewhere, the performances were not quite as good, with aluminum shedding 0.5%, zinc, 0.8%, and nickel, 3%. Overall, however, prices performed a little better than expected.
Metals prices are being supported at current levels by a mixture of supply-side concerns, a more positive tone to recent U.S. data releases, and a better technical picture, all of which are discouraging fund short-selling. But this is unlikely to last. If key technical levels for copper and aluminum, at US$1,750 and US$1,550 per tonne, respectively, can be convincingly overcome, then there may be a little more upside, though it’s doubtful either metal has the legs to break above recent ranges.
The problem for the base metals complex is not technical but fundamental. The intense downward pressure that appears to be driving the euro back down to test its recent lows is a reflection of growing unease over the future of the eurozone economy, in which growth is now decelerating sharply and inflation rising. Asia, too, appears to have taken another turn after yesterday’s catalogue of worse-than-expected Japanese data. If prices do test the upside in the current week, the move is likely to prove short-lived and merely the precursor to a fresh test of support.
Fund short-covering and some small amounts of fresh buying enabled copper to extend the rally it had embarked upon at the end of the previous report period, taking the LME 3-month price to a peak of US$1,756 per tonne, its highest since mid-March. Thereafter, the market failed to build on its gains as participants opted for trading the range from US$1,720 to $1,756 per tonne. After the report period’s fresh highs, the copper market appears (technically at least) to be showing some signs of strength, with the 10-day moving average rising above the 30-day average. However, this trend has been heavily reliant on fund-buying: Comex data shows an 11,000-lot fall in net short positions during the week. Fundamentals remain uninspiring, and, with the likelihood of discouraging data coming in from Europe and Japan, investors should not rule out a move back to, and possibly below, the US$1,700-per-tonne level.
It’s unlikely that the strike at the Palabora copper mine in South Africa (expected to produce 90,000 tonne of copper this year) will interrupt metal output unless it is sustained for some time. The company has large stockpiles of raw materials, which have enabled it to keep the smelter and refinery operating. As a result, refined output is still projected to reach 100,000 tonnes in 2001. Meanwhile, China’s April trade data show continued strength in imports of the red metal. Net imports of refined copper were up 21% to 172,000 tonnes in the January-to-April period, compared with year-ago figures. Scrap and concentrate net imports also grew strongly, up 16% and 25%, respectively.
Aluminum prices failed to hold on to the gains made earlier in the week after failing to clear US$1,550 per tonne on three separate occasions. Long liquidation then uncovered solid support at US$1,520 per tonne, which is not surprising given fears that there will soon be further cutbacks in Brazil and possibly British Columbia. Nearby spreads continued to ease, causing the cash-to-3-month contango to move to US$14 by week’s end. Nevertheless, LME stocks rose 21,000 tonnes, taking the rise since the beginning of May to almost 114,000 tonnes. To establish fresh upward momentum, the LME 3-month price requires a clear break above US$1,550 per tonne. This level has yet to be tested in good volume but may prove difficult to overcome even if a concerted spate of buying develops.
Global aluminum production growth continues at a slow pace. The International Aluminum Institute (IAI) reports that output in April fell 2.1%, year over year, although China actually reported a 15.1% production increase between January and April (the country is not monitored by the IAI). The end result is a global growth rate of just 0.6% for the January-to-April period. While alumina prices remain low (spot is currently at US$150-155 per tonne), China’s production will likely continue to increase since primary aluminum capacity is expected to grow by at least 350,000 tonnes this year. Nevertheless, the possibility of further cuts to production in other regions suggests that global aluminum production growth is unlikely to top 1% in 2001.
Despite virtually no fundamental news in nickel trading, prices are beginning to show signs of weakness at current levels. Following the previous week’s brief test of US$7,400 per tonne, prices were unable to attract sufficient buying interest to forge higher, leaving a downtrend to be established from US$7,300 per tonne and below. Several factors — a move below the trading range of US$7,100-7,300 per tonne; consecutively lower closes; a lack of response to moves higher in the copper market; and a move below the 10-day moving average for the LME 3-month price — all suggest that the impressive May rally in nickel prices could be coming to an end.
Although nickel edged only gradually downward during the period under review, prices are now in a technically precarious position. The established trading area prior to the rally toward current levels is about US$6,600 per tonne. Over the course of two days during the second week of May, nickel prices leapt a total of US$800 per tonne. The threat now is that as prices weaken, they will be unable to fill this US$800 chart gap by gradually ratcheting lower. Risks to the upside have diminished as the shorts below US$7,200 per tonne have all been flushed out. Buying on May 24 and 25 came in at good levels and prevented more severe falls, but we doubt this buying will be sustained at levels of sufficient magnitude to prevent a return to the US$6,600-6,800-per-tonne range before too long.
LME 3-month zinc prices hit a new low, dipping to US$942 per tonne, the lowest since January 1999. Prices have now shed almost US$280 per tonne from their peak of US$1,220 per tonne in September 2000. This translates to a 22% price fall, compared with much smaller declines of 9% in aluminum prices, 15% in copper and 18% in nickel, making zinc the poorest performing base metal of the past seven months by a considerable margin. Given zinc’s poor fundamentals, we see no reason why the decline should end, and the 1999 low of US$914 per tonne looks as if it will return soon.
Chinese trade data confirms suspicions that zinc exports from that country have rebounded strongly after falling slightly in the first two months of the year. April saw a dramatic 32% year-over-year rebound in Chinese exports to more than 65,000 tonnes. Judging by China’s growing appetite for zinc concentrates (up by an astonishing 1,390%, year-over-year, in April to 186,000 tonnes on a gross weight basis, probably boosted by late customs clearance of earlier shipped material) and the well-documented increases in Chinese smelting capacity that are now coming on-stream, zinc exports stand a good chance of beating last year’s record level of 575,000 tonnes.
Cominco has announced that further cuts are possible at its 290,000-tonne-per-year smelter in Trail, B.C., where output has already been cut by 120,000 tonnes this year in order to profit from electricity sales. The cuts are likely to last into 2002.
After one of the most hectic and eventful weeks in the gold market for many months, prices closed on May 25 markedly down from the highs reached earlier in the report period. The near-US$300-per-oz. trades conducted in Asia at the start of the week ended in a sharp selloff on May 24 as Russian President Vladimir Putin mooted the idea of selling gold reserves to fund flood relief efforts in Siberia. However, Putin couched the idea in the vaguest of terms, neglecting to mention when, by what means and
by how much. The point of interest however was not so much the Russian story itself but the market’s reaction to it. A 75% reversal of the previous Friday’s gains returned prices to within US$2 of the pre-rally price, even though the reports were later given clarification and lost some of their potency.
The episode highlights the vulnerability of gold prices to external shocks and clearly shows how risky it is to hold a long position in gold. Even amid the most favourable conditions prices had experienced for months (a tight lending market, the emergence of inflationary fears, higher lease rates, a reduction in the contango, solid technical support, vastly improved sentiment and the return of speculative funds to a net long position), prices have been unable to maintain momentum. The relationship of the gold price to inflation is weak empirically and has only a tenuous link to the recent rally. The most bullish factor for prices remains higher lease rates due to changes in the lending curve. With shorts now squeezed out, however, pressure on the lending market may ease somewhat, and with it, gold prices.
— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.
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