Trading data from the Commodity Futures Trading Commission indicate that speculative interest in copper is at its highest level in the past six months, so markets could be vulnerable to long liquidation.
Meanwhile, exchange stocks of the major metals continue to fall rapidly at a time when, given the summer holiday downtime, they should be rising. This should help to limit the downside. Copper (up 20,800 tonnes) and aluminum (up 17,300 tonnes) both registered hefty falls during the report period July 31-Aug. 4, though the zinc stock draw slowed (down 1,200 tonnes) and nickel stocks registered their second consecutive weekly increase (up 490 tonnes).
Market sentiment is good, but uncertainty over the global economy continues to cloud the fundamental outlook. Although recent U.S. data suggest that some sectors of the economy are performing strongly, a larger-than-expected fall in June housing sales would appear to be taking its toll on the metals-intensive construction sector. Also, the continued weakness of the Euro could hinder the usual European consumer restocking as the summer holidays end. In the Far East, there are fresh signs of Japanese economic weakness, with leading indicators slumping and declines reported in both household spending and household income in June.
But how well-founded is this optimism? From a fundamental perspective, the picture for copper is still unclear, and recent events have done little to clarify matters. There is considerable uncertainty about the strength of market fundamentals in the first half of the year. The International Copper Study Group’s upward revision to its global market deficit to 230,000 tonnes for January-May from 46,000 tonnes in January-April appears positive and is far greater than the decline in total exchange stocks over the period (London Metal Exchange, Shanghai and Comex: down 183,000 tonnes). However, we think it fails to account for a buildup in off-warrant stocks during the first half of the year, which would cut the deficit to around 150,000 tonnes.
High Chinese imports of copper are fuelling rising stockpiles there. Indeed, the state-owned Nonferrous Metals Industry Administration has confirmed a buildup of around 100,000 tonnes of stock in Shanghai. In addition, the organization estimates that Chinese cathode imports in the first half of 2000 totalled 329,000 tonnes, with imports for the whole year expected to reach 450-500,000 tonnes. This would indicate that a sharp drop in Chinese buying is expected in the second half, at a time when only 125-150,000 tonnes of refined copper will be required as local stocks are consumed.
The U.S. economy remains a major concern, and recent data have added to uncertainty over the extent of the slowdown. Gross domestic product in the second quarter was 5.2% (well above expectations), and June’s 5.5% surge in factory orders was the biggest monthly increase in the past nine years. However, a larger-than-expected 3.7% decline in June housing sales would seem to suggest an unambiguous decline in the construction sector, which accounts for around 35% of U.S. copper demand. The latest U.S. copper consumption data show that shipments of copper and copper-alloy mill products softened a little in June, compared with May. The June figure was still 12% above the year-ago figure, but this is well down on the year-on-year growth rate of more than 20% earlier in 2000.
The risk for aluminum prices remains on the upside. About 190,000 tonnes of primary aluminum smelting capacity are in jeopardy, owing to high power prices in the Pacific Northwest. The power situation remains tight in the region, with President Bill Clinton ordering federal agencies in California to cut power consumption by 5% and local power officials asking residents to cut back on electricity usage as the summer heatwave persists. Even if there are no further power-related cutbacks, the prospect of restarts of recently idled capacity are slim since forward power rates are still well above break-even levels for the smelters. Even factoring in higher production from the Mozal Aluminum smelter in Mozambique (owing to its earlier-than-expected startup) and Alcoa’s and Alcan Aluminum’s previously announced restarts in the second half of 2000, the market faces the prospect of a deficit of more than 600,000 tonnes in the first half of next year, putting substantial upward pressure on prices.
The prospect of a lengthy strike at Sudbury cannot be ruled out since disagreement between unions and the company is said to be considerable. The differences of opinion are not only financial but involve many of the principles that form the basis of the labour contracts at Sudbury. One reason the talks could drag on is that unions at Falconbridge traditionally have taken firmer and more militant stances than those at rival Inco.
The strike is occurring just as nickel is moving out of deficit and into surplus. Supply-side issues for nickel are not the pressing concern they were when the Inco strike hit the market. Increased production levels together with weaker demand growth are acting to undermine sentiment. The strike action at Sudbury will have to last until force majeure is declared, and even then, with sentiment muted and fundamentals weak, it may be an uphill struggle to inject much upward momentum into prices.
Further signs of the easing of the supply side in the nickel market came when Noril’sk, the world’s largest nickel producer, released figures showing that exports from Russia in the January-to-May period were up 17.4% year-on-year to reach 94,700 tonnes. Following the usual seasonal closure, the port of Dudinka is once again open and shipments of metal from Noril’sk will be arriving soon in Western Europe.
News of higher Chinese exports led to fund-selling and liquidation of disappointed longs on Aug. 3 and took prices to a near 3-week low of US$1,145 per tonne, as US$20 came off the price to deliver another technically weak close, below the bottom end of its recent range and just under the 30-day moving average. Prices on Aug. 4 failed to recoup the losses and suffered another weak close to end the week in London at US$1,152 per tonne.
Exports from China, which have been growing at an almost continual annual rate over the past 10 years, have become one of the most crucial price-determining factors in the current zinc market. China’s zinc exports for the first half of 2000 were 31% up, compared with year-ago levels, at 296,011 tonnes and are on target to reach an all time high this year.
Against this background, the gold market looked calm and muted. Prices in the first part of the report period continued their downward trend, though they looked to be consolidating around US$278 per oz. before Aug. 3 and 4. That’s when selling accelerated the fall and took prices through resistance at US$275 per oz., down to a 5-week low of US$271.95. Physical buying was seen in afternoon trading, which provided support and prevented a move below US$272 per oz. and saw prices close in London on Aug. 4 at US$274. On the downside, US$272 per oz. is now the next level of support, and we expect to see this being tested in the days ahead.
— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.
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