Base metals continued their steep downtrend during the report period June 18-22. Prices have been falling steadily for four weeks now, and the major traded metals registered their fourth consecutive week of across-the-board declines. Nickel was the hardest-hit, the weekly average cash quote shedding 5%. Aluminum, copper and zinc all plumbed new lows, with cash prices falling about 1%. Technical weakness, rising London Metal Exchange (LME) stocks and deteriorating economic conditions suggest there is further downside to come in the short term.
Although there is some evidence that the de-stocking cycle in the U.S. is over (for example, stocks of autos are back to normal levels), the downturn in Europe and Japan is intensifying. Worse-than-expected results for May suggest the German economy may be heading into a recession. In Japan, the economics minister said growth is likely to be less than 1% this year and would not top that level for the next two years. A slightly stronger euro and weaker oil prices were mildly positive, but these trends are not expected to be sustained. LME stocks of most metals are likely to show consistent increases over the next few months as the market enters the seasonally quiet Northern Hemisphere summer, ensuring market sentiment remains depressed for the next few months at least.
The downtrend in copper prices continued, with the 3-month figure sinking to a fresh 2-year low of US$1,586 per tonne on June 21. Long liquidation in relatively thin market conditions appears to have been the main factor behind the continued price-fall, but funds have also been adding to short positions since early June, and data from the Commodity Futures Trading Commission, showing another increase in the net short position to 21,446 lots, suggest that this trend has continued.
The decline in LME 3-month prices took place against a background of tighter nearby spreads as the July-August spread moved to an US$18 backwardation on June 22. So far this year, spread tightness has tended to coincide with a rising 3-month price. The fact that it has not, this time around, reflects how poor market sentiment is. Expectations are that the tightness will soon dissipate, and, at presstime, there was speculation that substantial deliveries of LME stocks to LME warehouses were about to take place. If this speculation proves true, the backwardation is likely to be transitory. Nevertheless, a technical rally in LME 3-month prices should not be ruled out, given the large size of the fund short position. On the other hand, the LME 3-month price is likely to face stiff resistance at US$1,620 and then US$1,660 per tonne in the short term, on any move higher. The downside should be limited until spread tightness eases, with healthy support likely at US$1,580-1,590 per tonne.
One of the few firm areas for copper demand is China, where imports of the red metal continue to rise. Net imports of copper in all forms were up by just over 14% in the Jan-May period. Although imports of refined copper fell 5%, exports were down even more sharply, resulting in a small increase in net imports. More eye-catching is the massive increase in copper raw materials imports, notably concentrate and scrap. When taken with the 15% increase in local mine production so far this year, the implication is that China’s own production and consumption of refined copper are rising quickly.
The International Copper Study Group (ICSG) has revised its market balance projections and now forecasts a 130,000-tonne surplus in 2001, compared with a deficit of 250,000 tonnes back in November 2000. The change is due to poor demand prospects, and the ICSG forecasts a dip in demand this year. In 2002 slow supply growth and a recovery in demand are expected to push the market into a deficit of 360,000 tonnes. By way of comparison, our own forecasts are for an 80,000-tonne surplus this year, switching to a 75,000-tonne deficit in 2002.
Primary aluminum continued the steep descent that began in late May, as LME 3-month prices fell to US$1,463 per tonne, the lowest level since early April. Despite good levels of forward-buying interest, long liquidation continues to push aluminum prices lower and, for once, there was no news of fresh production cuts to steady the market. With the forward curve for aluminum still in backwardation from 12 months onward, prices for 2002 and 2003 look like a bargain for consumers. However, if forward-buying levels are not sustained at recent levels, there is a good chance of another step lower for the LME 3-month figure. In the short term, aluminum prices may well re-test the recent lows of US$1,450-1,460 per tonne, bringing the lows of a year ago at US$1,435 per tonne into sight. Upward moves are likely to struggle at US$1,485 per tonne, and then at US$1,500.
We anticipate a turning point for aluminum prices sometime later this year, but, at present, the mood of the market is extremely bearish. This is not surprising. Although the de-stocking cycle has come to an end in the U.S. (significantly, recent data show that U.S. auto stocks are back down to normal levels), the situation continues to deteriorate in Europe. The poor showing of the German business climate index on June 22 is definitely cause for concern. Meanwhile, in Japan, prospects for a recovery in demand are worsening after Economics Minister Heizo Takenaka warned that economic growth this year will be close to zero and will not top 1% for two to three years.
Zinc prices continue to trend downward, though a move below US$900 per tonne (which had been looking imminent for some time) was averted by a rare period of price stability when, for three consecutive days, the LME 3-month figure closed at around US$920 per tonne.
There are several potentially bullish factors in the zinc market, though none appears to be wielding much influence. The strike at Cominco’s 120,000-tonne-per-year Cajamarquilla refinery, in Peru, is showing no sign of an early settlement, and, coming on the heels of several other production problems in both North and South America, the labour disruption may well put some upward pressure on premiums over the next few weeks. In the U.S., strong construction data and the return to more normal levels for auto inventory suggest that underlying conditions for zinc demand are improving.
However, with Europe and Japan still worsening, the global outlook for consumption remains poor, and the market is not being helped by the high level of Chinese exports. Exports from January to May approached 225,000 tonnes, only 2% below the record levels of the corresponding period of 2000.
Nickel prices continued their downtrend and found little of the expected technical or chart support at key price levels. As with copper, the focus moved sharply toward nearby spreads and away from 3-month prices as a long running backwardation was turned briefly into a contango. The fall below the 100-day moving average and the lack of support at US$6,400 per tonne have inflicted significant damage on nickel, leaving 3-month prices at their lowest level since late April. The next test for nickel is whether it can escape further falls and sustain a period of consolidation at around US$6,200 per tonne. Failure to hold at this level would bring a test of US$6,000 per tonne into view and suggest that the lows of late in the first quarter may come under renewed pressure during the quiet summer months.
The main feature of the nickel market of late is spread volatility. The long-term backwardation in the cash-to-3-month spread has been reversed, moving briefly into contango for the first time since early 2000. The contango, however, was small and short-lived, and, by the end of the report period, the backwardation had returned to the US$50-per-tonne levels, last seen at the start of June.
For some months, nickel prices have been operating in a thin market, enabling a few dominant players to keep prices high and the backwardation in place. Short-covering pushed prices higher, and short-term seasonal supply factors, plus low LME stocks, enabled longs to maintain the backwardation. At
the same time, deteriorating fundamentals now mean there is an easing in nearby metal availability, which suggests that the overall downtrend in the nickel backwardation will continue. Several recent developments increase the validity of this view, and of the likelihood of a reduced backwardation. Russia announced that the port of Dudinka will reopen, allowing shipments of Russian metal to resume. Also, Noril’sk, in Siberia, confirmed its earlier announcement that a 20,000-tonne cut in exports will take place this year. Taking into account the sharp fall in first-half exports, however, this amounts to a cut of only 9%, year-over-year, in second-half exports. At a time of increasing output and weak demand, this is probably insufficient to improve nickel’s fundamentals.
After spending most of the report period moving in a narrow US$2-to-$3-per-oz. trading range, gold made a half-hearted attempt on June 22 to break out on the upside. At one stage, the yellow metal was trading to a high of US$275.60 per oz., but it soon fell back again. The narrowness of the trading range and the thinness of trading volume have produced something of a stalemate in the gold market. Prices have become increasingly congested, leading to a convergence of moving averages, giving little clue to future price direction.
Although prices managed a slight increase above this trading channel on June 22, it was insufficiently sharp and too short for it to register as break-out. Prices therefore remain hemmed in by the same technical limits and continue to be restricted on the upside by resistance and a lack of follow-through buying. The situation is therefore one of increased uncertainty and nervousness: everyone knows that prices will shift, but no one knows for certain which way. It is this uncertainty which forms the bedrock of current price support and is also preventing a move lower.
— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.
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