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The metals prove their mettle, led by zinc

19/01/06

The equity sell-off that dragged down other markets just provided another buying opportunity for the metals and once the follow through selling failed to appear, the market moved higher to regain all its lost ground. This just goes to show that the market is not yet ready give up the high ground. With copper back above $4600 the market seems out of danger, the question is whether the rebound was driven by short-covering alone, in which case the market may well run out of steam again, or was it driven higher by fresh buying in which case it may well move higher still.

ICSG data for Jan- Oct 2005 showed refined consumption fell 1.2% with primary and secondary output up 2.9% and an overall deficit of 203,000mt. So although the deficit shrunk, the market was still tight. However, since LME copper stocks have been on the rise since late October, perhaps the market is now more balanced. If it is, then watch for LME stocks to continue to rise and for the backwardation to ease further.

Given the extent of the rebound in the base metals, highlighted by zinc’s move to new high ground and reports that funds are still embarking on investing in the commodities, as shown by Hermes Pensions Management's announcement and Goldman’s launch of 34 new funds, it suggests there is still room on the upside. The main worry, however, is whether prices are only going up because the funds are buying, if so then it is not a particularly sound situation. Also worth noting was gold’s failure to hold on to its rebound. Thursday sees the release of US housing starts (expected 2.05 mln), jobless claims (expected 315,000), EIA petroleum & natural gas reports and the Philadelphia Fed Survey (expected 13.2 after 10.9 in December).

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