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Base metals put in a quiet day as copper drifts

13/01/11

Copper pulled back below $4550 as profit-taking kept the market soft, which suggests the fund buying has for the moment been satisfied. Aluminium and zinc remain well supported with both metals nudging to fresh highs. Supply concerns continue to portray a bullish scenario for the metals that has attracted a lot of fund interest which seems to have been on the pick-up again since the start of the year. Although the supply side of the metals does look tight, it is likely to become less so for some of the metals as 2006 progresses. For example whereas Chilean copper output failed to reach target levels in 2005 dues to poor ore grades and disruptions, this year output is expected to rise by 6.5%. Chile’s COCHILCO also sees 2006 average copper price at or above 2005 levels of $1.65/lb, which suggests there room for a price decline from the current $2.06/lb. In addition, any deterioration in the economic outlook could accelerate the move lower.

Yesterday’s remarks by ECB President Trichet that there are risks (downside) to economic growth in Europe highlights the potential for slower demand and the weakening of the dollar this year, suggests that there has been a pick-up in concern about the US economy, which is not so surprising considering the debt, the housing market and the various deficits. Indeed, the rise in concern may well be behind the rise in the precious metals. Given the extent of the advance in base metal prices and the fact that they look overbought means the metals look vulnerable to a correction and any increase in concern over the demand side may well start to tip the balance, especially if it coincides with a pick-up in LME stocks.

Friday’s US data includes PPI (expected to rise 0.4%, less food and energy expected up 0.2%), retail sales (expected to rise 0.8%, less auto up 0.4%) and business inventories (expected to rise 0.3%).

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