Red metal gains more momentum

Copper and aluminum prices moved sharply higher during the report period Aug. 28-Sept. 1, with the former hurdling over the US$1,900-per-tonne resistance level and the latter gaining US$50 per tonne over three days before faltering at US$1,600 per tonne.

Meanwhile, nickel prices moved in the opposite direction during the second half of the week, as negotiations resumed at Falconbridge’s Sudbury, Ont., operations.

The rallies were driven by an upsurge in U.S. fund interest, which more than offset the effects of a sharp fall in the Euro. In recent months, metals prices have tended to be undermined by Euro weakness. The higher prices attracted producer selling in aluminum and zinc, though not in copper markets, for which forward spreads out to mid-2001 eased. However, if base metal prices are to build on their recent gains, consumers will have to re-enter the market before too long. With Northern Hemisphere holidays drawing to a close, low visible stock levels may encourage some of those returning from holidays to alter the hand-to-mouth buying practices that have been evident so far this year. On the other hand, the weakness of the Euro is likely to dissuade many European consumers from committing themselves, while U.S. and Asian consumers are also likely to be cautious, owing to uncertainty in their own business prospects.

Copper‘s return to its previous highs for the year has been supported by a surge in U.S. fund buying (mainly due to Commodity Trading Advisors) on the back of strong technical indicators. Although data released by the Commodity Futures Trading Commission (CFTC) show a small dip in the net speculative long position on the Comex in mid-August, the events of the period under review almost certainly indicate that speculative interest in copper is back at its highest level since early February.

Prices could continue to climb from current levels, but only if this latest move gains fundamental support. If it does not, fund liquidation could result in a similar downward adjustment to the one seen earlier this year. Producers certainly appear to have faith that the price rise will be sustained. There has been little forward-selling in recent weeks; moreover, during the report period, the 3-month-to-July-2001 spread moved back into contango after trading in backwardation for many months.

Consumers, however, are more cautious. So far, they have shown little inclination to chase prices higher, having been partly deterred by the strength of the U.S. dollar against major consumer currencies. One factor that may persuade consumers to re-enter the market is continued falls in London Metal Exchange (LME) stocks.

The recent increase in LME cancelled warrants suggests that the rapid pace of stock decline is set to continue. It is perhaps significant that there was a big increase in cancelled warrants in Hamburg (now at 12,800 tonnes) to add to the steady flow of metal out of this particular warehouse.

Aluminum prices moved up smartly early in the report period, but their failure to break through the US$1,600-per-tonne level suggests that the upside is limited in the short term, with producer selling being a major obstacle. Despite further declines in LME stocks (minus 10,825 tonnes during the report period, dragging the total to below 400,000 tonnes), sentiment was dampened on Sept. 31 after the European Central Bank raised interest rates a lower-than-expected 25 basis points, sending the Euro to a new low of 0.8836. In recent weeks, producer selling has been noted on Euro currency dips, and, if nothing else, the fresh low will keep European consumers out of the market for all but their immediate requirements. Meanwhile, consumers in other regions are showing little inclination to chase prices higher either.

Nickel prices experienced mixed fortunes, owing to the strike situation at the Sudbury operations of Falconbridge. Prices rallied to a midweek high of US$8,770 per tonne as negotiations broke down over picket-line disruptions but fell back again sharply as talks were resumed, resulting in a weak close on Sept. 1 of US$8,320 per tonne (only marginally above the 10-day moving average). Price volatility during the report period underscored the precarious position of nickel — and highlighted its vulnerability to a price selloff, should the strike end soon.

Stock falls continued to aid the nickel market as levels ended the week down 540 tonnes to reach 12,564 tonnes. Although LME stocks remain at 10-year lows, rising production and slower consumption growth are expected to feed through to the market soon. The report period’s stock fall was less than a third as great as the one that occurred earlier in August. In addition, cancelled warrants now amount to less than 500 tonnes, compared with more than 4,000 tonnes in early August.

Zinc prices ended the week firm despite a large rise in LME stock levels and weak closes on Aug. 30 and Aug. 31. Fund-buying and speculative interest on Sept. 1 pushed prices through resistance levels at US$1,190 per tonne; then producer-selling and profit-taking emerged as prices approached US$1,200 per tonne. Although prices failed to break the psychological US$1,200-per-tonne level during the Sept. 1 rally, the market now looks well-supported.

Large deliveries into LME warehouses in Singapore and Barcelona contributed to hefty rises in stock levels. Aug. 29 saw a 4,975-tonne increase and pushed total stocks to 214,400 tonnes — the highest level since mid-July. Movements in LME stocks have been volatile of late, coming within 700 tonnes of the 200,000-tonne level in mid-August, then, after the report period’s increase, climbing back up to 214,400 tonnes — again, the highest level since mid-July.

The rapid turnaround in zinc stocks raises the question: From where has this material come? Most sources point to off-warrant material that has been placed on-warrant by a major trader. This ties in with recent data releases that suggest a rise in off-warrant zinc stocks so far this year. Data from the International Lead and Zinc Study Group show that there was a 24,000-tonne surplus in the first half of the year, compared with a decline in LME stocks of 55,000 tonnes. The surplus suggests that there was a rise in off-warrant stocks of around 80,000 tonnes, which, in turn, suggests that the LME stock draw during the first half of the year was not all going into consumption.

The irony is that zinc prices now look poised to test the US$1,200-per-tonne resistance level at a time when data on stocks, supply and demand are pointing toward an easing of the physical tightness as the market moves into balance. Given this, zinc prices may find that resistance provided on the upside at US$1,200 per tonne could prove firmer than the support it may offer on the downside.

Gold prices bucked their recent weakening trend on the strength of the American greenback, rising as the Euro hit an all-time low on Aug. 31. However, not too much significance should be read into this, since the main reason for the rally was early short-covering by U.S. funds ahead of the Labour Day holiday weekend. The latest data from the CFTC show that, prior to the recent rally, funds were still significantly net short.

The spike, which took gold to a high of just below US$278 per oz., looks set to be short-lived. Indeed, gold could well move lower in response to Euro weakness, and after the report period’s lower-than-expected 25-basis-point increase in Euro zone interest rates, the Euro will likely come under further selling pressure.

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