Forex Investment and Currency Trading

Aluminium

Three-month prices slumped by 9% from a high of USD 3,250/tonne (t) in early March to a low of USD 2,808/t in the second half of March. The market was hit by a triple whammy of bearish news. First, there was a general selloff in the industrial metals, as recession fears gripped the market following the collapse of US investment bank Bear Sterns. Second, there was a big jump in LME stocks. Aluminium inventories rose from 947 thousand tonnes (kt) at the end of February to 1.02 million tonnes (mt) in mid-March - representing a high 9.8 days of global consumption. Third, the problems in South Africa turned out to be less severe than some in the market had been predicting. While 1.5mt of smelter capacity was threatened by the lack of power, in the end BHP Billiton announced a modest cutback of 120kt in annual production. Finally, Chinese buying has not been that strong in recent weeks, with the Shanghai 3-month price (excluding VAT) now at a discount of around USD 600/t to the LME.

Outlook: Aluminium prices are expected to stay high in the weeks ahead, with a weak dollar expected to support commodity prices generally. However, the physical market is likely to soften as Chinese smelters restart and new greenfield smelters such as Sohar start to come onstream. Moreover, the economic weakness spreads from the US to other countries during the year, helping to slow consumption growth. Given this backdrop, aluminium prices are expected to trend lower to around USD 2,550/t by year-end.

Copper

Despite its relatively tight fundamentals near term, the three-month copper price was also hit by the general retreat from commodities in mid-March. The price fell from a high of USD 8,810/t in early March to a low of USD 7,620/t in the middle of the month. LME stocks fell by 18kt in the first half of March and remain very low at 125kt or 2.5 days of consumption. However, this was exactly offset by an increase of 13kt in stocks on the Shanghai Metals Exchange. Moreover, the Shanghai 3-month copper price (once VAT is excluded) continues to trade at a significant discount to the LME (currently 4%) - suggesting weak Chinese demand at current levels. Data for February also showed that output of fabricated copper products fell by 30% m/m, whereas copper production was little changed.

Outlook: The outlook for copper is highly uncertain. On the one hand, prices are being hit by worries about the economic outlook and the impact of a US recession. Also recent data on China has been poor. However, the market remains very tight from a fundamental perspective and doubts persist about the reliability of power supplies in Chile - the world’s largest producer of copper. Given these conflicting drivers, prices are likely to remain high and volatile in the weeks ahead, although they should trend lower as the year progresses.

Lead

Three-month lead prices also dropped sharply in early March. By the middle of the month, prices were down to USD 2,660/t - a 23% drop from their high in early March. Fundamentally not that much has changed, although consumers have been complaining for many months that LME prices were not reflecting the reality on the ground. This meant that there was little support from consumers as funds rushed to reduce long positions. LME stocks, for example, now stand at 47kt - little changed from 46kt at the end of February. The market shrugged off bullish news from China, where lead production was down by 36kt m/m (13%) to 175kt in February. Producers were affected by snowstorms and electricity blackouts.

Outlook: Like copper, lead is currently strong from a fundamental perspective, but its short term price direction remains dominated by flows from commodity investors. However, lead demand is now past its winter peak, which could see LME stocks starting to be rebuilt as the year progresses. Also, greater availability of lead concentrate is now being reported, with a ramp up of the San Cristobal mine in Bolivia being important. This will help ease the lead market as the year progresses. There seems to be some potential for prices to bounce back in the short term.

Nickel

It was a particularly bad month for nickel. As news of the collapse of Bear Sterns started to emerge, the three month LME price fell by 10% - its largest daily fall in over three years. The price fell to a low of USD 28,200/t at one point before recovering slightly. LME stocks remain stubbornly high at 47kt - or 12.3 days of consumption, providing an ample cushion against any supply problems. Moreover, latest reports from the stainless steel sector indicate that the long awaited recovery is proving to be sluggish. Metals consultants CRU are currently estimating that global stainless production will be down 2.8% in the first quarter of this year. One bullish factor though has been the ongoing strike at BHP’s 50kt/y Cerro Matoso mine. Given that the mine accounts for 3.5% of global supply this is certainly providing some support to prices. Also, reports suggest that the scrap market has now tightened meaning that any demand improvement will feed through more directly into nickel prices.

Outlook: Nickel prices are expected to be one of the worst performing base metals this year. While Q2 should see some recovery in stainless steel demand, it will be from a low base and is unlikely to prevent the nickel market from being
oversupplied again this year. prices are expected to trend lower.

Tin

The tin market was a notable exception within the commodities complex, with prices soaring through most of early March and the market proving somewhat immune to weakness elsewhere. The three-month price reached a record high of USD 20,000/t in mid-March - up 7% from the start of the month before retreating. Fundamental developments were largely behind this rise, with problems in both China and Indonesia - the world’s biggest producers. China’s tin production fell 16% y/y in the first two months of this year due to snowstorms, and exports dropped to 3t in February from 305t in January due to a new export tax. Furthermore, PT Timah, Indonesia’s largest producer reported that its exports were being blocked by police action targeted at illegal mining in the country.

Outlook: While the move up in tin has been fairly dramatic, prices seem to have run somewhat ahead of fundamentals. The tin market is likely to be tight this year but consumption growth remains weak. The tin price is forecasted to remain high in Q2 - around USD 18,000/t - but then heads lower.

Zinc

Sharp falls were also seen in the three-month zinc price in early March, due to the general base metals rout. The price fell by 15% from its peak to hit a low of USD 2,265/t by mid-month. Fundamentals have played very little role in this price move but they are certainly not supportive. Zinc mine supply is expected to grow strongly this year. In Peru, for example, zinc output rose 12.4% y/y in January to 130kt due to a ramp-up at the 335kt/y Antamina mine and strong growth is also taking place in Bolivia, with the 235kt/y San Cristobal mine coming onstream. These two mines account for 5% of global supply. While Chinese zinc production fell by 10% m/m in February due to power shortages, this was overshadowed by strong supply growth elsewhere.

Outlook: With zinc demand heavily tied to the weak construction sector and strong supply growth coming through in Latin America there seems little reason to be bullish about prices at present. While some support is expected to come from
commodity investors and a weaker USD, zinc prices are forecasted to trend lower as the year progresses.