Base Metals Hit Two-Month Highs But Analysts Cautious On Outlook

LONDON (Aug 9) Base metals all rocketed to their highest levels in roughly two months or more on a view that data from China the last two days suggest that the economy in the key commodity-consuming nation is holding up better than previously thought.

The bounce got an extra boost from short covering, in which speculators with short, or bearish, positions became buyers to offset their bets.

Still, analysts are offering at least some caution about the outlook for the base metals until there is more clarity on the strength of the Chinese and global economies, as well as supply/demand surpluses in some of the metals.

As of 11:10 a.m. EDT Friday, three-month copper hit a high of $7,298 a metric ton on the London Metal Exchange, its strongest level since June 7.

Tin hit a peak of $22,320 that was its most muscular level since April 12. The other four LME base metals hit their highest levels since the period between June 5 and 13, including aluminum, $1,874; nickel, $14,745; zinc, $1,954; and lead, $2,179.

Some of the more lightly traded metals such as lead and tin have been ticking higher since the end of last month, said Stephen Briggs, senior market strategist with BNP Paribas. Then the entire complex spurted the last two days, led by bellwether copper.

“The immediate cause for this was clearly Chinese economic data that came out – both the overall trade figures for China and also the import numbers for copper,” Briggs said. “It’s both a macro story and a micro story, if you like, concerning copper imports. That’s been confirmed by the second set of Chinese numbers out last night and this morning – Chinese industrial production in particular.

“It has given the market a sense that perhaps the Chinese economy is stabilizing rather than continuing to slow.”

Data Thursday showed that China’s overall exports rose 5.1% year-on-year in July after a small fall in June and were well above expectations for a 3% rise. Imports jumped 10.9% year-on-year.

Further, the trade data showed that Chinese copper imports rose 12% year-on-year in July to a 14-month high of 410,680 metric tons, which analysts attributed to bargain hunting and arbitrage on the difference in prices between the LME and Shanghai Futures Exchange. The country is the world’s largest consumer of the red metal.

Then on Friday, Chinese authorities reported that industrial production accelerated 9.7% year-on-year in July. Expectations had been for 8.9%, which would have been unchanged from June.

Earlier in the week, European economic data also showed improvement, Briggs added. Further, the U.S. dollar had a softer tone in recent days, which can help demand for commodities generally by making them less expensive in other currencies.

“But they did not do more than prevent prices from declining until we got these Chinese numbers,” Briggs said.

Meanwhile, the metals got extra fuel for their rally since many speculators and investors had established short positions in anticipation of further weakness, explained Briggs and Robin Bhar, metals analyst with Societe Generale.

“So, that (Chinese economic) news, and a weaker dollar, prompted a lot of shorts to start covering,” Bhar said. “That has given momentum to the market in the short term.”

John Gross, an independent metals-industry consultant, said he attributes much of the strength to technically oriented trading after the metals had become “oversold,” with support also coming from the softer tone in the dollar over the course of the week.

Analysts Cautious About Outlook

Bhar said he remains cautious for the longer term and looks for prices to be capped at some point.

“We still have concerns about China’s growth long term,” Bhar said. This is particularly the case as the country transitions to one that relies upon domestic consumption.

Briggs looks for more gains in the near term, but otherwise has mixed views on the base metals.

“We’re not going to go up at the pace of the last couple of days because of the short-covering element,” he said. “But I think the rally has more legs.”

However, Briggs said, in the case of copper, he would see an abatement in the rally as a selling opportunity due to deteriorating supply/demand fundamentals. Output is expanding and most analysts look for global supply/demand surpluses this year and next.

Barclays, in a weekly commodities report Friday, reiterated its view that the rallies in copper are an opportunity to sell short. While Chinese end-use consumption has been better than expected, the bank also suggested a build in domestic stocks is occurring.

“Months of strong copper inflows into China could weigh on apparent demand later in the second half, which alongside strong momentum in global production growth leads us to expect the fourth quarter to be the low for prices this year,” Barclays said.

Briggs described nickel and aluminum as markets with large surpluses. However, he added, “I rather like, fundamentally, lead, zinc and tin.”

Barclays also was upbeat on tin and lead, in particular, due to projected supply deficits. The bank said it sees more potential than usual for differentiation in pricing of base metals during the second half of the year. 

Gross, meanwhile, sees this week’s gains in the base-metals complex as a temporary bounce in a longer-term downtrend.

“The markets have been in a downtrend since early 2011 right across the board,” Gross said. “At this point, we are calling this a technical correction in the overall downtrend.”

The downtrend is due to the lack of a stronger global economic recovery, particularly considering the quantitative-easing measures in the U.S. and a number of other nations, he continued. At the same time, he continued, production is rising for some metals.

“All of that will continue to mean higher inventories,” Gross said.