While the bulls continue to see a seamless story of metal re-stocking moving from China to the West, several analysts remain skeptical. The bulls gets support from good GDP performance by Germany and France (Bloomberg report) ; others cite the UK’s poor performance (Guardian report) in explaining how industrial European economies are helped by Eastern (read Chinese) infrastructure-related demand while consumption-driven Western economies continue to struggle.
Bulls see stabilization in the housing and auto sectors in the the US encouraging demand for metals. Others see those sectors mainly driven by the “Cash for Clunkers” program and housing rebates which will be over in the coming months. The former has $2 billion of corpus while the latter benefits first-time borrowers with a rebate if registered with lenders by the end of Sep 09 (CNBC report).
Economists warn that the success of “Cash for Clunkers” program could be at the cost of consumption of other products (Marketwatch Report). The fact remains that the world economy continues to be under the influence of government programs. Cash thrown by central treasuries may have stabilized the downfall. However, what remains to be seen is whether the patient can live without steroids and also how big are the side-effects.
Bears tested the strength of bulls last week but moved away quite quickly leaving Copper, Nickel and several equity indices at a new 2009 high. Other base metals consolidated in range. The pace of rise in metal prices is helping supply side to gather momentum; Chinese data vindicates this fact. Aluminum production in China could be rising as indicated by rising import of Alumina. China imported 610,000 tonnes of alumina in July, up 15.1% from June, and 3.29 million tonnes of alumina in the first seven months of 2009, up 175 % from a year ago.
Last year, Nickel pig iron producers were profitable above $20,000. Given lower freight and energy cost currently, the break-even for them could be even lower. Meanwhile, Chinese import of scraps for Copper and Aluminum jumped in July (Steelguru report). This seems to be backlogged metal bought in earlier months and cleared by customs in July. Besides, rapid price rise chokes consumption and attracts inventories to exchange warehouses. Shanghai Copper stocks rose by 12,673 mt this week, after rising 12,299 mt last week. We expect quite more queued up in next coming weeks. Similarly, Nickel could see large stock inflows in LME. We think that stock changes shall be closely tracked in the next week and could have increasing influence on prices.
It is quite interesting to see energy products not participating in the rally. In last two months, crude and natural gas prices have fallen 1.7% and 28% respectively when copper and aluminium have moved up 24% and 23% respectively. To some extent this indicates caution amongst investors as CFTC prepares to tighten its grip (Latest development - Reuters) and to some extent subdued consumer demand in US (Consumer confidence disappoints - CNBC) and 20 year high in stocks. From the money-flow point of view, we see Base Metals partly benefiting from investors’ reluctance to invest in energy products. We hear that Copper shorts could cover back their positions aggressively if prices move above $6500. With this, we fear that base metals (specifically Copper, Aluminum and Nickel) could repeat what Crude did last year – in terms of speed of change.
Extending our price-view in the last week, we expect consolidation to continue with downward bias. Technically, few metals are at critical juncture and if selling momentum intensifies, those could leave a bearish “double top” pattern viz: Aluminum, Zinc and Lead. We expect strength of buyers to come on test this week, once again. Besides, we are keeping a close watch on Chinese equity market which has quietly retreated 12% from the top last week. Last year, Chinese equities led as a turning point in financial markets.
Disclosure : No Position
