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Metals race higher, copper and zinc setting fresh highs

20/03/06

After a steady Asian trading session the base metals got off to a strong start on Friday with copper standing out as the leader, closely followed by zinc. The question is, are the funds back in or has this rally been triggered by short-covering as tensions rise over the Grasberg mine in Indonesia. Overall, the fact that copper and zinc are powering ahead suggests that the period of consolidation has passed and the rally is building up steam again, although why is aluminium not following to the same extent? If the one-way bet attitude is to dominate again then a good level of fund participation is going to be required, especially as all the metals with the exception of zinc have seen a steady rise in stocks.

Fundamentally zinc remains in the strongest position so it is not hard to justify zinc’s latest rally, however the situation in the other metals is not quite so fundamentally sound. There is little doubt that the situation is tight, but the high prices already reflect that. In copper’s case ICSG data for 2005 actually showed the refined copper market was balanced last year with a 2000mt surplus after deficits of 887,000mt in 2004 and 426,000mt deficit in 2003. When you consider 2005 was plagued with supply disruptions, then if there are less disruptions this year in addition to the new supply coming on stream, the swing to surplus could be quite noticeable. In the other metals, except zinc, the steady rise in stocks also suggests there is little evidence of shortage. In the latest CFTC data the net fund position swung round to being net long to the tune of 711 contracts so after Friday’s movement it will be interesting to see how much the position has changed and whether it was driven by fresh buying or mainly short-covering. Overall if the funds are building up their positions again, then expect aluminium to play catch-up with copper and zinc, but if Friday’s moves were more short-covering in nature then there may not be so much follow-through buying.

US data out today includes Leading Indicators, expected to read 0.6%. Fed Chairman Bernanke is also speaking at the Economic Club of New York.

 Live base metals price charts available at www.basemetals.com/freecharts/
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