Base metals prices staged a technical rally that soon ran out of steam during the report period April 15-19. For the time being, price action in copper, gold and zinc appears to be taking place between the 10- and 30-day moving averages as market participants bide their time and wait for signs of better demand to emerge.
The exception to the general trend is nickel, which, in the space of five months, has gone from being the weakest London Metal Exchange metal to the strongest.
Nickel led the base metals complex during the week under review, shrugging off a massive 1,900-tonne, 1-day stock increase to hold at close to its recent highs above US$7,000 per tonne. Despite the stock rise, visible inventory levels are low, helping to underpin a rally that, on a monthly chart, is starting to resemble the pattern of other recent price spikes.
Is nickel pointing the way that other base metals will soon follow? It was the first metal to recover in the 1999-2000 rally, leading the rest of the base metals complex by around three months. Because it has a relatively large distributor sector (downstream stainless steel), nickel is particularly sensitive to the stocking cycle, and the recovery in nickel prices bears an interesting resemblance to those that characterized the base metals bull markets of 1994-1995 and 1999-2000.
However, one thing that sets nickel apart from its LME brothers during this economic cycle is its low level of visible stocks. For the other base metals, particularly copper and zinc, visible inventory is now at historically high levels, and unless inventories start to fall soon (and by large amounts), prices are likely to pull back further on disappointed fund liquidation. The upturn in leading economic indicators is taking a long time to feed through into better physical metals demand, and, for the time being, the prospect of big falls in inventory seems remote. There is little more than six weeks to go before the onset of the summer slowdown, when stock rises are inevitable. The market is now approaching a critical juncture.
After regaining some of its mid-April losses, copper now appears becalmed in technical trading between the 10- and 30-day moving averages at US$1,590 and US$1,620 per tonne, respectively.
The major stumbling block to any concerted recovery in copper prices is the massive level of industry stocks. Not only are they high; they’re visible as well. LME and Comex stocks are at their highest since the recession of the early 1980s. Combined LME, COMEX and Shanghai stocks now total 1.5 million tonnes, or about five weeks of consumption.
Speculative buying has been the main driver of prices so far this year, but now it’s crunch time. There is a distinct seasonal pattern to movements in copper inventory, and unless stocks now begin to fall rapidly (providing evidence of the recovery in market fundamentals that the funds have been trying to pre-empt), prices could fall dramatically.
What are the prospects of this happening? Demand still appears weak. Anecdotal reports suggest a poor outlook for European demand, while U.S. wire rod orders have failed to build on the improvements seen in January- February and are now trending sideways. U.S. brass mill orders are only slightly better. The one bright spot is Asia, where demand for electrical-related brass products is firming, as is demand for ACR tube (for air-conditioning and refrigeration field service applications). But none of this is likely to support the kind of stock draws that the market needs.
After a good week in which LME 3-month prices gained almost US$70 per tonne, aluminum now needs to climb convincingly above technical resistance of US$1,405-1,410 per tonne. Consumer buying interest is still encouraging, but the fundamental outlook is deteriorating.
The stunning production increases currently being achieved in Chinese aluminum — first-quarter figures show growth of 24%, year over year — is a negative factor in the aluminum market. The growth is proving much more rapid than anticipated, with most analysts predicting 10-15% this year. If it continues, China will switch from being a traditionally big importer to a major net exporter of aluminum to international markets in 2002.
After recovering early in the report period, zinc prices became hemmed-in to a narrow technical trading range set by the 10- and 30-day moving averages at US$820 and US$837 per tonne, respectively.
Zinc seems to be the most at risk among the major LME 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.
Although zinc stocks on the LME continued to shoot up during the week, there were a few positive developments. Chinese data showed metal production in the first quarter had fallen about 10% in comparison with year-earlier figures. In Europe, meanwhile, spot treatment and refining charges are falling to below US$150 per tonne, making further smelter closures likely — provided Outokumpu’s 200,000-tonne-per-year Tara mine does not reopen mid-year.
Gold prices spiked briefly to US$307 per oz. on April 18, after a small plane crashed into the tallest skyscraper in Milan. The yellow metal ended the week firmly supported by a weak U.S. dollar, Mideast tensions and strong oil prices, as well as the the perception that the U.S. economic recovery is starting to weaken a little. Although we remain skeptical about upward potential for gold, its support level moved up by US$4 per oz. to US$302 per oz.
— The opinions presented are the author’s and do not necessarily represent those of the Barclays group.
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