US industrial growth boosts prices

Growth in U.S. industrial production accounts for the price increases seen throughout the first quarter and indicates that business fundamentals in that country have responded well to the various fiscal and monetary injections received over the past 12 months.

Recent figures showing industrial production in February rising 0.4%, month over month, was all the more encouraging given the upward revision to January’s month-over-month figure to 0.2%. The manufacturing sector, the largest component of the report, climbed by 0.3%, month over month. The jump in the University of Michigan consumer sentiment survey to 95 in March from 90.7 in February suggests that retail sales data (which, despite market reaction, was actually pretty strong) delivered a misleading indicator on the state of current confidence levels in the consumption sector. With both business and consumer indicators in the U.S. pointing upwards in unison, the first-quarter gains in metals prices are in a position to consolidate before eyeing even higher levels later on in the following 3-month period.

However, there are still reasons to be cautious about near-term price expectations:

– business conditions are improving, but demand is still low;

– supply-side corrections have been made, but excessive stocks overhang the market;

– economic data remain firm but only in the U.S., and signs that this has already been priced in are emerging.

Despite these cautions, funds are showing an increasing reluctance to test areas of support in the base metals markets. Although mild price dips may take place over the near term as some of the initial exuberance is checked, these will likely be viewed as an opportunity to buy rather than an excuse to sell.

The main target for copper to break on the upside is US$1,675 per tonne, though initial resistance also lies between US$1,650 and US$1,670 per tonne. This resistance was able to cap any fresh attempts to climb higher on March 15 (the last day of the report period that began March 11) despite strong U.S. economic indicators which suggest that positive data from that country have already started to be priced-in. Prices will be doing well if they can consolidate above US$1,620 per tonne before the next batch of forward-looking economic indicators is released.

Aluminum drew encouragement from the perception that price dips are opportunities not to exit long positions but to extend existing exposure to higher prices. Although supply-side news was has been bad (London Metal Exchange stocks rose by almost 30,000 tonnes during the report period, while U.S. aluminum production data increased 4% in February, month over month), prices have managed to recover from dips down to support at US$1,420 per tonne. As with copper, firm resistance lies ahead (at US$1,440 per tonne) and may cap increases over the next few days.

By March 15, a strong performance by nickel had pushed prices to their strongest close yet in the current recovery cycle. By comparison, prices earlier in the week were in a technically weak position and vulnerable to a test of support at US$6,200 per tonne. Such a quick reversal in nickel’s fortunes leads us to suspect that these latest gains will prove to be but a short-term spike. LME stocks continue to fall, but cancelled warrants (a precursor of future stock withdrawals) are at their lowest levels since November 2001, suggesting stocks may soon start to register net increases again.

Dealer short-covering on the price dips was able to hold zinc at the higher end of US$820-840 per tonne for most of the report period. We suspect that it has been this short-covering, rather than a genuine response to the stronger base metals complex and U.S. manufacturing data, that has supported zinc prices at these levels. For this reason, zinc looks the most likely to retrace its recent gains over the near term. Misleading headlines regarding the reopening of the Tara mine in Ireland initially pushed prices lower — an indication of the true strength of prices at current levels. Initial support is US$820 per tonne.

Gold has been trading in a lacklustre fashion as funds failed to respond to the move into a higher trading range of US$292-295 per oz. Fund liquidation, rather than fund-buying, still seems to be the order of the day, and it was this that led prices to a poor close on March 15 at around US$290 per oz. This close returns gold to the US$288-to-$292-per-oz. range again and extends the downward price channel that deteriorating prices have formed since gold’s peak, in February, at around US$300 per oz. Technical indicators are now neutral, leaving more room on the downside for prices to trade below US$290 per oz. without putting too much pressure on the relative strength indicator. Resistance above US$292 per oz. has been reinforced by the latest price falls, and attempts to regain lost ground should meet with technical resistance partly from the 10-day moving average and partly from the downward trend lines that connect recent, diminishing price peaks. For the short term, initial support should be found at US$288 per oz., though we expect a move below this level to trigger further liquidation and an eventual return to the low US$280s.

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