Metals prices are proving to be resilient in the face of slowing economic growth and a barrage of discouraging economic indicators. In the race for stability and strength between the U.S. dollar and the euro, the best that either competitor can say currently is not that its economic figures are better than the other’s but simply that they are less bad.
Despite some disappointing economic data, metals largely stuck to their own course during the report period April 30-May 4. Copper prices improved by 2.1%; aluminum, 2.7%; and nickel, 3.7%. Zinc, which fell 0.8%, was the sole loser and, as usual, ignored the events that surrounded it. Although prices were initially knocked downward by the unexpectedly poor employment figures from the U.S., the recovery was quick and has left supportive technical factors firmly in place. The speed of the initial fall, followed by the rapidity of the recovery, illustrates the dilemma faced by metal markets as the economic outlook improves and bad, time-lagged data emerge.
What impact will this improving outlook have on metals prices? From a consumer’s perspective, we suspect activity will begin to pick up in the second half of 2001 as the U.S. economy recovers, even though a stronger U.S. dollar may deter fresh European interest from entering the market. But could the stronger and more stable U.S. dollar that we forecast, despite the negative impact it has on European consumers, actually benefit prices? Fund activity is the key at present. Flows away from the U.S. dollar on May 4, following the release of poor U.S. labour data, were reflected in weaker metals prices as funds exited dollar-denominated positions. As the euro economy slows during the second half, the U.S. dollar will gain in strength at the expense of a weaker euro. If fund activity remains the main determinant of prices, however, the metals complex, while drawing strength from an improved U.S. manufacturing base, could benefit as a result of increased activity from the U.S. funds and a more resilient greenback.
The continued focus for copper remains the aluminum market. Prices are still struggling to establish a base above the US$1,700-per-tonne area. Despite two consecutive closes above US$1,720 per tonne and a strong technical picture as the 10-day moving average crossed above the 30-day average, prices remained US$20 per tonne below the previous week’s highs, though we suspect that, through increases in aluminum, copper will retain an upside bias.
From a fundamental stance, there are elements of support and encouragement. Figures from the U.S. have provided further evidence of the strength of the construction sector, despite the manufacturing weakness. A 1.3% month-on-month rise in construction spending in March was the fifth consecutive monthly increase. On an annual basis, spending rose 3%, which leaves construction spending this year to reach an annualized rate of US$854.4 billion — the highest level on record. The key uncertainty for prices remains confidence. Surprisingly poor U.S. labour data highlights the market’s sensitivity toward weak indicators and serves as a reminder that time-lagged jobless data, and therefore confidence indicators, may yet be fully built into price movements and sentiment.
Although aluminum prices continue to be the strongest performer on the London Metal Exchange, signs of vulnerability are clearly visible. Having already moved higher by around US$100 per tonne in the past month (following a series of steady upward shifts and a tightening in spreads), the price is bound to suffer setbacks given the current economic environment. Hence the weakness at the end of the report period, which returned prices once again to the US$1,540-1,560-per-tonne trading area. On the whole, however, we believe the bias will remain on the upside.
Technical factors and weak U.S. employment data do not fully explain the vulnerability of current aluminum prices. The reports from the world’s major auto producers showed that, compared with last year, car sales have weakened considerably. The sales figures of the three major U.S. producers alone — General Motors, Chrysler and Ford — account for a fall of more than 16% in April. On an annualized basis, however, sales remain on target to hit the third-highest level on record.
Supply-side factors remain the focus as the market awaits further news from Brazil, clarifying potential smelter cutbacks, and from Russia, where the 840,000-tonne-per-year Krasnoyarsk plant has been threatened with power cuts.
The ability nickel prices have to weather the downturn in economic confidence on both sides of the Atlantic proves, yet again, the metal’s resilience. It also highlights the technical nature of the current market and leaves predictions on future price movements uncertain.
At the start of this year, we stated that nickel prices in the first half would remain susceptible to moves higher before continuing the downtrend later this year. Despite our view that the economic outlook will have improved by the second half, we still expect this to be the case as long as the stainless steel sector remains in the doldrums and prices stick to current levels. Growing levels of production at pressure-acid-leach plants strengthen the view that the fundamental supply-demand outlook beyond the first half remains gloomy.
The breach of several areas of resistance during the report period has little to do with current demand-side fundamentals. As the nickel market emerges from a seasonally tight supply period, the chance that “technical” factors alone can hold prices at current levels becomes remote, and we expect to see downward movements resume as the summer approaches. Even the short-term technical picture is starting to look less inspiring. The short positions that have existed in the market for some time will, by now, have been increasingly covered, leaving little room for momentum.
Zinc prices have probably not reached their low point, and hopes for a recovery are diminishing. However, on the back of a firmer base metals complex, prices were able to stage a partial recovery by approaching the US$980-990-per-tonne trading area. On the down side, resistance has built up, particularly around the area of the 10-day moving average of US$975 per tonne. The consequence for price behaviour and market sentiment is bearish; prices on May 5 convincingly broke through the US$970-per-tonne support level for the first time in almost two years and have shown no signs since of experiencing a sharp upward bounce off the lows.
The reaction of copper and aluminum to the weak U.S. labour data clearly led zinc prices lower, even though prices had gained only slightly on earlier rises. Zinc’s prospects for the remainder of this year do not look encouraging, and we see little chance of a recovery above US$1,000 per tonne during the current quarter. Moving through to the second half, several factors, including a recovery in the U.S. economy and higher copper and aluminum prices, can be expected to support a mild recovery, though we expect rising Chinese output and exports to cap price increases.
In the meantime, the failure of the U.S. dollar to make significant gains is keeping zinc prices higher in local currencies and, at the same, reducing production costs in U.S. dollar terms. As a result, producers are under little pressure to slash output, which will only prolong the depressed state of zinc prices.
The uptrend in
the net fund short position on the Comex division of the New York Mercantile Exchange remains substantial;
the lending market remains tighter than the historical norm;
lease rates are above average levels; and
the U.S. dollar continues to be buffeted about by the slowdown in the U.S. economy.
However, rather than be encouraged by recent events behind the improvements and the ability of prices to sustain a range at or above the US$264-per-oz. level, we have been disappointed by gold’s progress. The ability of the above-mentioned factors to hold prices
at current levels is weakening, and we believe the failure of recent price improvements to push prices above significant areas of resistance and attract fresh fund interest points to a return to a downward trend.
Although the net fund short position remains sizable, the latest Commitments of Traders report clearly shows that it is losing its potency to generate a short-covering rally of any substance. Since April 10, the short position on Comex has been reduced by 30,163 lots, the equivalent of 301,630 oz. The corresponding price increase resulting from this fall has lifted prices by around US$15 per oz., away from their lowest levels for 20 years. The remaining 28,000 lots of speculative short positions, therefore, look unlikely to be able to engineer a rally.
Equally, we remain confident that strength will return to the U.S. dollar. The latest unemployment data from the U.S. has prevented the greenback from retracing its steps against the euro. Still, the latest batch of economic, business and consumer confidence surveys coming from the eurozone leads us to believe that it is only a matter of time before the euro re-assumes a defensive stance.
— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.