Copper bottoms as nickel plummets

The metals market got what it wanted during London Metals Exchange Week (Oct. 22-26), with Phelps Dodge announcing substantial cuts to its high-cost copper operations in the southwestern U.S. In spite of the news, the average LME cash price for copper shed 1.8%. Nickel was hit even harder, losing almost 11%. Indeed, the only gainer in a poor week across the board was lead.

Phelps Dodge was careful to point out that further cuts were needed to balance the copper market, which is also true of the other base metals (except aluminum and lead). However, supply cuts alone will not be sufficient to turn the market around — a recovery in demand is also required, though, with consumers continuing to buy only from hand to mouth, none appears to be forthcoming. Recent U.S. data on durable goods, home sales and initial claims are poor, though not poor enough to prevent that country’s stock markets from rallying in anticipation of a recovery next year.

The copper market was unimpressed by Phelps Dodge’s announced cut of 220,000 tonnes per year. The LME 3-month price did rally to a peak of US$1,414 per tonne just after the news but then fell back to below US$1,400 shortly afterwards.

The market remains jittery about the possibility of production cuts at Grupo Mexico, which is expected to release third-quarter results soon. If a large cut is announced, prices could climb significantly. (The 90,000-tonne-per year Mission mine, where costs exceed 80 per lb., is the most obvious candidate for closure, but 120,000 tonnes per year of concentrate production at the Ray mine are also high-cost at 65 per lb.) However, it’s unlikely that the LME 3-month figure would hurdle past US$1,440 per tonne until there’s a clear sign that demand is recovering. If no cut is forthcoming (and, on balance, we expect Grupo Mexico to try to hang on for a while yet), then prices will likely trend down to the low US$1300s.

Phelps Dodge says its cuts were required to balance the market, because improved demand is not expected to rescue copper any time soon. Demand for the company’s wire and cable products is especially weak, with magnet wire down 15% this year and high-performance conductors down 30-35%. Phelps Dodge estimates that, by year-end, the global copper surplus will be around 500,000-600,000 tonnes.

Aluminum prices took a back seat to copper as the market reacted to the ebb and flow of the latter’s price movements in the wake of the Phelps Dodge announcement. Prices rallied twice to the US$1,313-per-tonne level but were unable to move higher, and the lack of follow-through buying as prices rose suggests that the downside will be evident in the very short term, with initial support projected at US$1,280 per tonne. No production cuts are expected in aluminum, and US$1,340 per tonne is likely to provide stiff resistance.

Zinc prices moved up sharply on Oct. 26, gaining US$20 per tonne to trade at a high of US$787 per tonne, thanks to speculation that production cuts were imminent at any of several different sources. Among the possibilities is Grupo Mexico, which has already issued worker adjustment and retraining notification at its Asarco Tennessee zinc mines. Given the dire straits of zinc-market fundamentals (underscored by a recent 8,975-tonne increase in LME stocks) and the extent of the price action so far, it’s difficult to imagine zinc prices improving substantially even if cuts are announced. We expect the focus soon to return to the downside with a test of US$765 per tonne.

Although nickel did achieve more stability this week, against a backdrop of nervous markets which were constantly focused on rumours of possible production cuts it is noteworthy that the price was largely immune to the bouts of short-covering that affected copper, aluminum and even zinc during the report period, and little attempt was made to return technical indicators to neutral. Given this, we continue to hold to a bearish short-term view and set our next price target on support at US$4,400 per tonne.

The key determinant of possible price moves in gold is the U.S. dollar, which has proved highly resistant to downside pressures. Prices have consolidated their gains against the euro following the swathe of bad U.S. data that emerged on Oct. 25. We believe that without significant weakness in the greenback, it is difficult to forecast a sustainable increase in gold prices. In the short and medium terms, we retain a downside bias. At presstime, prices appeared unlikely to test and breach resistance at US$278 per oz.; instead, they’re more likely to require support at US$275 per oz. Below this level, the move to US$270 per oz. could be swift.

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