Focus on copper and nickel

Keep an eye on commodities in these times - particularly copper and nickel, as they are always the first to respond to signs of life. You can watch these commodities at:

1. Copper

2. Nickel

Please note our review of the economic outlook in 'Market Commentary'.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Dubious outlook for metals

The current gold market suggests we might be looking at a change in fortunes for the gold market. This next week will be telling; but we might be looking at an overall weak metals market. This would spell a more compelling argument in favour of agricultural commodities in the short term. The problem of course for gold - despite the debasement of global currencies - is the very strong underlying fundamentals of global market liberalisation that have continued unabated since the 1990s, if not before. Earnings in Western countries have remained flat, which means the productivity gains have accrued to businesses to be sure, but also to 'cheap labour' in the third world, whilst more Westerners live off benefits.

We can probably expect a weaker commodity outlook for the next year, but we might see some selective recovery before long, i.e. copper. This of course will not be the end of the commodities story. We are still looking at a commodities 'super-cycle', but things will be off in the short-run, at least in metals. I tend to think agricultural commodities will hold up better, but this is not my market of interest generally.

NZ Property Guide Philippine Real Estate Guide Japan Foreclosed Guide

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

The gold price set to rally in coming months

I am expecting a rally in gold prices in the coming months as the central banks deal with their financial crisis. The gold price has been consolidating around $US1700/oz, and this is a support level. I am ultimately expecting the gold price to reach a level of around $2400/oz.

Check out our gold equity blogs for the best entry into Australian and Canadian stocks. Not all gold stocks are over-priced. There is some good value among the emerging stocks; though one needs to look for those stocks which are sufficiently large or supported by private equity to raise fnance in these troubled times. I've seen a number of stocks simply collapse because of difficulties raising capital. One which we like is Base Metals Ltd (BSL.ASX). I would not be surprised to see this company go into voluntary liquidation in coming months if it cannot attract the support of a Asian investor/metal trading house/base metal consumer. The company appears to be under-capitalised; not a desirable quality in the current market with the strong $A.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Commodities taking a lead - gold and copper

I am about to go out hiking, however I note that gold is breaking out into a new uptrend. We have also seen copper prices reach new highs of $4.63/lb. These are what we might regard as the post-Xmas commodity-equity market rush of blood that we like so much. Charts to come later. Its a beautiful day!

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Outlook for copper supply & demand

Here is a forecast for copper demand presented by an emerging copper producer. The forecast comes from the USGS, the US Geological Survey. They prepare a detailed account of all the mines around the world, so theyh have a good picture of the metal inventories, but I would not trust their forecast for the following reasons:
1. The idea that global demand grows by 3% compounding - is divorced from the current economic context
2. When I want an understanding of global market forecasts, the last people I speak to are government depts. They are notoriously bad at forecasts.
3. The amount of copper sold into the market will depend on an array of factors which this govt dept just has not grasped. Once again, I don't look to govt depts for an accurate depiction of the nature of reality, not for a current view, and certainly not a view of how the world will look in 20 years time.

These forecasts are however used by corporates seeking to pip up their stock prices or raise some money. The problem I have with this forecast is that its extrapolating an exponential curve off the top of a government-stimulated economy, and here we are now, just about to go into a period of rising inflation and interest rates. The full context of this forecast can be gathered from IRN or the USGS website.
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Andrew Sheldon www.sheldonthinks.com

Copper prices close to support

It will be interesting to see if copper prices hold their current levels in the coming weeks. I have less confidence of that than I do in nickel. Nickel prices have fallen far more, and I think the outlook for building construction and consumer items would have to be more secure than copper use. The dynamics for copper supply are a little tighter though, however I would not be surprised to sell a short term sell off to $5,1oo/tonne. Its a huge fall, so its not a position I would trade. It might well stay above $7,000/tonne. I dont have any empirical evidence to suggest this market will fall, just that its vulnerable. The other reason for caution is the extent of trading in copper as a financial instrument.

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Andrew Sheldon www.sheldonthinks.com

Copper price outlook - falling to $3.00-3.30/lb

The price of copper is looking peakish at current levels. That is evident enough based on copper prices and the rise in copper stockpiles. LME stockpiles rose for the first time several months. The copper price is currently $3.97/lb, slightly down on its recent high of $4.00/lb, an important technical resistance. This is the 6^th time copper prices have reached such levels before being sold off. Its important to recognise that this volatility is being driven by copper supply shortages (due to strikes & project bottlenecking) and USD movements. These factors are responsible for the volatile technical trading between the $3.00 to $4.00/lb price levels. I dare say this will be the last time that copper prices fall. I would suggest the next rally in 2^nd half of 2008 will see copper break the $4.00 resistance.

In coming weeks there will likely be more rallies tied to USD weakness, but the technicals are likely to see copper fall back on softer demand issues. The net long, or bullish positions held by non-commercial investors in the US copper futures market rose 27% to 9,581 lots in the week to April 1, compared with 7,555 contracts a week earlier. I suspect they will be unloaded this week. The price of copper is up more than 30% this year.

There are traders suggesting that strong demand from world No. 1 consumer China will outweigh any slackening in consumption caused by a recession in the USA, but this market talk neglects the significant part US consumption plays in Chinese demand. It will take time for US sluggishness to feed through to Chinese demand.

LME inventories rose 1,000 tonnes to 116,150 tonnes - their first weekly rise since mid-February, though stocks still remain tight at just 2 days of global consumption. Citigroup regards copper as the most positive of the base metals. It has lifted its 2008 price forecast by 14.7% to $3.556/lb ($7,840/tonne) and $3.50/lb for 2009 ($7,716/t). Citigroup said prices in 2007 were supported by 800,000 tonnes of production losses compared to expectations. As a result of these supply shortages, there is likely to be a market balance in 2008. In the long run there is every chance that we will see $10,000/tonne copper, but it will not be until emerging market demand recovers.

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Andrew Sheldon www.sheldonthinks.com

Copper prices up, stockpiles falling

There is some good news in the market for copper stocks, as copper prices are up to $US3.50/lb, and seem destined to reach $US3.75/lb before they are sold off. The reason for the rise is clearly stronger demand, but also traders in futures covering short term requirements. Mostly its just technical trading. I see copper trading this range for a year to come.
Stockpiles are falling as a result - in fact stocks are plummeting on the LME. See Kitco.
The copper price like alot of commodities is trading in an ascending wedge, and will eventually break out as a result of inflation or debasement of the USD.
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Andrew Sheldon www.sheldonthinks.com

Copper prices reach new high

Copper prices have broken out to fresh highs, in fact copper prices are up almost 3% at this point to $US3.40/lb, though I expect prices will pull back to support at $US3.30/lb in coming days. See the charts at http://www.kitcometals.com/charts/copper_historical.html. The UK Bank of England has followed the Fed by cutting rates. The prices have limited upside. I dont see prices breaking $3.90/lb, but we can expect institutions to trade the metal between $2.90-3.80/lb. So I see the metal going sideways for some time to come, but with good rallies.
Basically we are looking at copper forming an ascending wedge structure with the apex to be reached in a year or so. I can see it breaking out at that point due to inflation and a weak USD, but I can also see higher interest rates undermining the copper price at some point. The other emerging trend will be the amount of money doing into new mine development around the world. I see this step as a currency management policy to some extent correct the over-investment in US treasury notes (ie. A falling USD). That investment will eventually result in higher mine output whilst higher western inflation will eventually undermine western consumption.
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Andrew Sheldon www.sheldonthinks.com

Copper prices break support

Copper prices have fallen to $3.12/lb, breaking an important support at $3.20/lb. The positive news is that we have a Fed meeting on Thursday, and if there is a Fed rate cut, that might be enough to support the market. So we might see a recovery. Spot prices will under or overshoot, so it would be worth waiting for that confirmation of market direction.

Base Metals - due for a shake out?

The base metals like Copper, Aluminium, Zinc and Lead seem to be holding up very well considering the uncertainties in the market. In contrast nickel is faring far worse, but it has likely bottomed. Paradoxically nickel miners are recording strong prices. There are I guess a number of reasons for this:

1. Strong demand from China

2. A market view that the Fed will support the market with a rate cut

3. Tight supplies for some metals

Having said that, the fundamentals dont look so good for some metals, and some charts might give reason for concern. The chart above shows that copper prices have retreated from a strong resistance level. My belief is that copper is headed down to $US2.50/lb, but it will then find support. Long term I think the outlook is positive, and we are likely to see an ascending triangle develop in coming years....a protracted period of high prices. I think things will be ok in the short term because it takes time for bad loans to be liquidated, and in the meantime there are strikes and the prospect of a Fed stimulus. But I really dont see higher copper prices in the medium term.

1.Copper prices have been held up by strikes in Chile and Mexico

2. We have yet to see any flow through of softer demand from China

3. There is a shortage of lead and aluminium because of a lack of discoveries. Stocks are thus short and prices bouyant.

But there has been alot of nickel capacity added so nickel prices have collapsed. But we might expect a turnaround there, so for the next 2-3weeks I expect stronger metal prices, but then massive selling.

Copper - a declining story

Copper is amongst the most important commodities, and hence one of the most traded commodities. The metal can be traded in several ways:

1. London Metals Exchange (LME): They quote spot & forward prices, current inventories.
2. Chicago Commodities Exchange (COMEX): They quote spot & forward prices in the US market.
3. Equities: There are a range of companies listed on the Australian Stock Exchange (ASX), Toronto Stock Exchange (TSX), Vancouver Stock Exchange (VSX), Johannesbourg Stock Exchange (JSE) and the Alternative Investment Market (AIM in London) for investing in copper equities (ie. production). The impact of exchange rates tends to increase forex gains, but reduce equity price gains.

Copper has a multitude of industrial applications including building, automotive, electrical & electronics, tube & piping, marine applications, machined products, telecommunications. For more details see http://www.copper.org/applications/homepage.html. In the US, the building industry accounts for about 46% of copper demand. Little surprise then that copper prices have rallied whilst the US housing market has boomed. Those homes are also furnished with electrical appliances requiring copper.

Copper production has recently staged a recovery as demand-led price recovery signalled a need for further capacity. Yet looking at http://www.copper.org/resources/market_data/images/c1wrld.gif, its apparent that the supply of new copper has been flat for a number of years. The reason for this is clearly innovation, since global growth was strong throughout the 1990s. In addition, copper stockpiles were high in the early 1990s, but its clear that miniaturisation has reduced demand (see http://www.copper.org/resources/market_data/images/global93-02.gif ). It was in the early 1990s that prices were languishing below $US0.80/lb, well below the current prices of around $US2.00/lb. Partly this rise can be attributed to the weak $US in which commodities are denominated.

Outlook

Despite the subdued demand for copper, producers have largely maintained discipline. Larger companies are prone to finance exploration through the 'explorers' rather than go at it alone, developing their own projects. This synergistic relation worked well at low prices, but with higher prices, 'explorers' are able to finance their own projects, so we can expect market discipline to unravel in future. The amount of new capacity has been limited to date because little money has flowed into resource equities. Regardless, commodity prices were low for so long. In the interim however, we can expect a demand-price slump by virtue of the end to US-Chinese largesse. The mercantilist policies of Asia, combined with the debt-exposure of the western markets will limit consumption for about 4 years. In the interim, the 'savings culture' of Asia is unlikely to see consumption expand greatly to cover the shortfall.

References

For more information on the copper market, follow the following links:

1. International Copper Association - see
2. Copper Development Association - see http://www.copper.org/
3. Base Metals.com - see http://www.basemetals.com/
4. London Metals Exchange - see www.lme.co.uk - for copper stop & forward prices, inventories

Copper Statistics

1. Global Copper Consumption - chart - see http://www.copper.org/resources/market_data/images/global93-02.gif
2. Global Copper Mine Production - see http://www.copper.org/resources/market_data/images/c1wrld.gif
3. Impact of emerging technologies on the copper market - see http://www.copper.org/resources/market_data/emerging_technologies.html