OUTLOOK FOR COPPER: "COPPER - A CASE FOR HIGHER PRICES?":
In terms of prices, the first-half of this year has fared far better than many were expecting.The broader economic climate has already shown signs of improvement and has surprised many analysts whom had not forecasted this occurrence until the 4Q.
However, it appears that the market bulls had got ahead of the game in Copper as prices have seen five consecutive monthly closes higher, and we are presently sitting in view of making it six in a row.
The question is where has this optimism come from when economists have been proclaiming doom-and-gloom from the demand-side perspective...
A significant part of the stronger picture has been derived from the voracious appetite of China, the world's largest consumer of the metal. Copper imports into China have leapt to record levels as the State Reserve Bureau has increased its strategic stockpile buying. In addition, the typically higher domestic prices over LME has pressured the incentive to buy from LME stocks for domestic consumption purposes. We do not need to be reminded that despite the negative GDP growth figures across several of the major global economies, China is still registering positive GDP growth, and the equivalent US$586 billion stimulus package by the government authority is creating further infrastructure investment demand.
In respect of LME inventory, we can observe a clear trend in relation to price. For the major part of 2008, inventory levels were at the opposite end of the scale relative to the underlying price, see Figure 1. However, in the 4Q 2008, the relationship inverted as the major price declines saw stock levels increasing. Of course the relationship is not presumed to be perfect, and this is highlighted by the 1Q 2009. In this instance, prices had already begun to ascend while the lagging effect on stocks continued to increase initially.
On a charting basis, the trend is positive thus far this year. As per the chart, see Figure 2, price has remained largely above its short/midterm moving averages. We can observe the inter-play between the 10 and 30-day MA's has resulted in no major breaches of the shorter-term below the longer-term MA. Moreover, price has traded largely above its 30-day MA so far this year. Should a breach below here surface, currently $4800, the next downside points of target focus on previously formed interim troughs observed in. April and May 2009, see Figure 2. These are represented by $4440 and $4175 respectively.
ALUMINUM: OVERSUPPLY = LOWER PRICES?
The massive oversupply in the market has been the dominant theme of recent times. LME registered inventory has topped 4.37 million tonnes, with unregistered stock suspected to take this figure much higher. This overhang has effectively acted to dampen the prospect of higher prices, which have remained relatively stagnant this year in comparison to the other base metals. However, with prices having bottomed-out in February 2009, a gradual positive trend has been formed, overtaking prices at the start of the year. Oversupply has not been the only challenge facing the Aluminium market as the demand side of the equation has clearly made its mark also. The struggling automotive sector is experiencing lower sales combined with overburdened debt problems. Car factory closures and debt restructuring measures have been implemented in an attempt to rescue the ailing industry, however, these have yet to prove redeeming.
The recent price rises above $1500 have rekindled production restarts. China, the world's largest aluminium producer has brought online previous idled capacity, with April alone suggested at over 1 million tonnes. With stock inflows appearing relentless, there is still no sight of a trend change on the horizon, see Figure 3. This has impacted upon premiums for the physical material, however, with a high percentage of the stocks tied up in long-term rent deals, premiums have been rising across the US, also, particularly across Asia. Hence, the availability of material on a short-term basis is relatively restricted.
Price pattern behaviour suggests the shortterm over-extension from circa $1400 to $1700 may retrace to the $1550 area before entertaining any further major advances. The interim peaks and troughs formed from March 2009 to-date, have retraced at least 50% before advancing past the previous peak. The record level of Open Interest (outstanding futures contracts) on the LME suggests a mid-term horizon window of price climbing above recent highs, i.e. above $1700. Strong support has been the latest trough in May 2009 see Figure 4. However, the occurrence event being tested may be brought should any short-term declines sufficient momentum to force crossover down through the The current scenario displays the $1638, comfortably above MA, $1557.
Courtesy: Angelo Gibaldi, General Manager, Triland USA, Inc.
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