Dow Jones/Non Ferrous Metals Outlook

Dow Jones/Non Ferrous Metals Outlook.
by Gianclaudio Torlizzi As forecast, aluminum and copper prices at the London Metal Exchange (LME) have increased since the beginning of the month and we believe that further gains are ahead. The copper 3-months contract climbed above 8,000 USD/t in week 15. This price level was last seen before the Lehman crisis in the summer of 2008. Similarly, the aluminum 3-months contract has ticked up by 4% since early April. However, the price of the light metal is nowhere near the levels seen in the months preceding Lehman. The comparative dollar-strength and concerns over China’s overheating economy were a negative for base metals prices in recent trading sessions. China’s economy grew by 11.9% in the first quarter of 2010. Given Beijing’s target growth rate of 8% for 2010, concerns arose among investors that the remainder of the year would see a downturn of economic activity of the world’s largest copper consumer. Already, traders at the Shanghai Futures Exchange (SHFE) reported weaker physical buying interest at current high price levels. Moreover, ever-increasing housing prices prompted Beijing to announce that it would intervene to stop the housing sector from overheating. China said it would tighten property-lending standards, and this was seen as a brake on the country’s fast growth. Weakened appetite for imports in China has also drained momentum from copper's recent rally. Inventories on the SHFE were up by 16,357 tons Friday to 185,895 tons. But concerns over Chinese buying will likely be short-lived as the country will be an avid buyer of the red metal even if annual growth comes down to 8%. End-demand conditions remain robust with the fiscal stimulus continuing to support end-user buying levels for the time being and subsequent robust refined import levels will be a result. In addition, demand in OECD countries is steadying. European consumers are reporting longer lead times for copper products as fabricators struggle to keep up with buying interest. A similar effect should occur in the US in the next few months. Consequently, stock levels are falling in OECD countries. At LME warehouses, copper inventories are down by 2% on month, which may prompt restocking activity later in Q2. The front end of the curve retains its slight contango formation: Since early March, the 15-months contract has ticked at a 0.6% premium over the cash price, indicating that investors’ perception of the storage market has not changed as yet. But prices should be supported as the market moves into the anticipated deficit in 2011. Any prices corrections should hence be short-lived. Aluminum stocks are also dwindling slowly from LME warehouses. There have been concerns over availability in the spot market as LME inventories are still tied up in financing deals. This shortage will continue to support prices for near-term deliveries. In addition, speculative buying also continues to support the metals prices and should be a bullish factor in the months ahead as interest rates will continue to remain low, the US Federal Reserve recently said. But the euro's sentiment remains weak amid ongoing uncertainty surrounding Greek’s fiscal issues. The resulting strength of the US-dollar has curtailed base metals prices from rising even more than they would have otherwise, and will continue to weigh on prices. But we believe that any dents should be short-lived as overall demand is solid and speculators appetite remains more than healthy. Aluminum and copper should see further single-digit percentage gains in the next four weeks.