Mideast crisis spells downside risks for metals

Several factors — the dearth of economic indicators that would indicate that manufacturing fundamentals are improving, the release of poor corporate financial results for the first quarter, and the perceived threat to a still-nascent economic recovery from high energy prices and a full-blown Mideast crisis — have all combined to undermine confidence in the industrial recovery.

For metals markets, which have developed a high level of speculative long exposure, this brings clear downside risks. Without the fuel of positive U.S. manufacturing data to maintain the momentum of higher prices, the recovery will slow down. The slowness could continue until metals consumers are persuaded to enter the market in greater volumes to pick up the momentum where funds are leaving off.

Retail figures at the end of the report period April 8-12, though marginally below expectations, showed that confidence among U.S. consumers remains in place. Following the release of the figures, Barclays Capital reaffirmed its expectation that real consumption growth for the first quarter will have increased by about 3%, supporting our view that US gross domestic product will have risen by 5% during that period. Continued growth in spending patterns on U.S. high streets is key to economic growth. However, for base metals prices, consumer patterns at the industrial-demand level are now the vital (and still missing) ingredient. In the short term, the “big figures” of industrial production, capacity utilization and housing starts are expected to contribute to growth. However, as technical support weakens and funds remain exposed to price falls, even positive economic data may fail to prevent fresh liquidation and further short-term price deterioration.

Copper had a stable week by virtue of the fact that heavy fund liquidation was avoided. Between US$1,570 and US$1,600 per tonne, however, prices remain below the price channel formed during the first-quarter recovery and a return to US$1,610-1,615 per tonne is crucial if upward technical momentum is to be restored to near-term price movements.

Although aluminum has failed to make much headway, it continues to move in an area of strong support. Then again, key resistance between US$1,380 and US$1,400 per tonne has to be broken in order to diminish current downside risks. The emergence of forward-buying over the past week is encouraging, and this, together with the expectancy of good U.S. data, should reinforce support — an important factor if aluminum is to avoid a fall on the back of the softer complex.

Nickel continued to perform strongly, with prices reaching another fresh high in the recovery cycle. Without the support of an active metals complex and with trading volumes remaining thin, a close above the price target level of US$6,950 per tonne failed, but in the attempt, support above US$6,700 per tonne has been strengthened. If the complex can develop fresh upward momentum over the next few days, this, along with firmer fundamentals, should keep nickel prices eyeing the upside.

Zinc seems to be the most at risk among the major London Metal Exchange markets. With an unenthusiastic complex providing little directional support of late, the metal has been left to trade on its fundamentals; consequently, prices will probably continue to head lower for some time. So far, prices have avoided a close below US$807 per tonne — the line of the 100-day moving average and a price signal which would technically undermine zinc’s prospects. A firmer metals complex could avoid further zinc dips. If not, a test of US$800 per tonne is possible.

The rise in the price of gold above support areas of around US$298 per oz. has more to do with the market’s current technical factors than with fundamentals. Headlines suggesting Middle East politics have driven prices higher are spurious at best and dubious at worst. Undoubtedly, the turbulence that has continued in the Mideast — in particular, the Israelis’ refusal to bow to international pressure — is a factor that cannot be dismissed. Rather than promote fresh and genuine safe-haven buying, the underlying tensions seem to have deterred selling by speculative funds. Long exposure remains at its highest level since the mid-1990s as data continue to show the confidence speculative funds have maintained in gold. Although fundamental changes within the gold market continue to suggest prices are on a sounder footing over the short term, indications are that above US$300 per oz., there is no shortage of selling. Furthermore, Japanese investors, a pivotal source of upward price pressure during the first quarter, look less likely to act as a price driver in the April-to-June period, as they have been noted sellers in recent days. Over the immediate term, while speculative funds remain influential, technical indicators should still be measured as a price guide. Initial support is now at US$300.50 per oz.; resistance, at US$303.50 per oz.

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