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Increased volatility in copper should be ringing alarm bells

25/05/06

Copper is the main culprit. Between Monday’s lows and Tuesday’s highs, prices rallied 15% only to fall 9% on Wednesday; little wonder the market is confused. I urge you to call up the market overview charts on the website and look for yourself how volatile trading has become. The combination of price acceleration since March and increased volatility spells out trouble. Indeed with a number of the charts mapping out reversal patterns such as the head and shoulders on the daily zinc chart, the spike on aluminium and the volatility on copper, it certainly looks as though the markets are troubled and beginning to wobble with uncertainty. This is does not instil confidence at these near-record high prices levels. Indeed with the powers-that-be also keen to stamp out speculation, which may include further margin rate hikes soon, it would not be surprising to see volatility increase, which could easily extend the recent lows. This in turn could see liquidation selling overpower fresh fund buying, at least momentarily, which is all it is likely to take to see another $1,000 wiped off copper prices, such is the way of the market.

The recent weakness in the emerging markets which has spilled over into the US, European and Japanese equity markets, also suggests investors are looking to reduce risk. In which case the base metals may see further liquidation selling, purely for exogenous reasons. Although the fundamentals for the base metals remain tight, we feel things are stacking up against a continuation of the up trend in the medium term. Supply is picking up, see ICSG data, substitution is bound to be biting, and these record prices are likely to be a huge incentive for the vast number of small and medium producers to maximise production. In turn, given the investment buying that has driven prices to these high levels we feel there is the potential for a lot of profit-taking to be done. All in all, although supply remains tight and is vulnerable to disruptions (especially with Inco and Alcoa’s labour contracts coming up for renewal), we feel a lot of the potential problems are already discounted in the copper price by now, but perhaps the slightly less bullish scenario has not yet been discounted, hence we feel there is room for a bigger correction.

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For further information please contact:

William Adams
Metals analyst, BaseMetals.com
press@basemetals.com
http://www.basemetals.com

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