Base metals - the funds dominate but the positive fundamentals remain in place This is the conclusion from the latest Base Metals interim Review from GFMS Metals Consulting limited, the division of the GFMS group that handles the base metals.
Author: Rhona O'Connell Posted: Thursday , 31 May 2007
LONDON -
GFMS Metals Consulting's latest interim review on base metals reports that the recent bout of fund-led profit taking has put the fundamentals into the background, as the technical picture worsened for a number of metals, leading to sizeable selling from momentum-based funds including the CTAs. The study covers the non-ferrous metals that are traded on the London Metal Exchange, plus cobalt, while there is a separate publication covering steel. This brief summary looks at the conclusions for aluminium, copper and nickel.
Despite the sell-off from the mid-May highs, most of the metals finished May fairly close to where they started the month and GFMS Base Metals Consul ting's base metals index stood, close to the end of the month, at 363.49 against 363.94 at the start of the month.
The report notes that with the exception of nickel there was no build in LME inventories in response to the backwardations that are in place and that even for nickel, the underlying level of inventories is so low that the increase in LME inventory (from a low of 4,446 tonnes on May 9 to 7,720 tonnes on May 30) was largely ignored. The group is of the view that the continued downtrend in inventories for the majority of the sector suggests that there is scope for price gains in June, but views for further out are mixed.
The review notes that most f the economic data during the month suggested more of the same - "rapid growth in the emerging markets, solid expansion in Europe and the potential for a recovery in the US". While noting sound underlying business confidence in Europe, the group comments also that the European car market remains weak, held back by poor conditions in the older EU member states while demand from the new entrants continues to expand d sharply.
The study is cautious with respect to the prospects for aluminium, noting that consolidated global primary aluminium production rose to three million tonnes in April, up by 12% from 2.69 million tonnes in April 2006, with year-to-date production up 27% to 11.78 million tonnes. Perhaps it is no surprise that China is the primary driver, while elsewhere there is steady growth in all producing regions with the exception of Africa. Demand in the US and Japan was down by 10% and 13% in the first quarter although European demand remains reasonably robust.
The copper sell-off is described as largely technical in nature with the more fundamentally-based funds staying on the sidelines, while the fact that the backwardation remains in place (currently $55/tonne back for cash-to-threes on a three month price of $7,255/tonne), highlighting both the tightened inventory position and, interestingly, the existence of a dominant long.
The group believes that the bulk of the weakness is now behind the copper market, although there is a measure of doubt as to whether China's performance is too good to last, as all the evidence points to the building of inventories within China so far this year.
Apparent demand in China has been estimated by the International Copper Study Group at 35% higher in the first two months of this year against January-February 2006, driving growth of 8.6% in consumption globally over the period. GFMS is of the view that the heightening premiums in the United States are a function of tightening supply rather than an indication of recovery in demand, noting that COMEX stocks are down to 27,400 tonnes.
The group takes the view that in the short term we could see new highs in the nickel price, but that cash prices will be hard to sustain over $50,000/tonne during the third quarter of the year. It describes the tug-of-war in the market, with demand weakening from the stainless steel sector, while there are increasing supplies from scrap and low-grade ferro-nickel. Utilisation rates at smelters are high, however, and labour disputes remain a feature of the market.
The report notes that recent independent estimates of an apparent deficit of 42,000 tonnes in the first quarter of this year (a 15% deficit) does not account for the surge in low-grade ferro-nickel output. There is an increasing trend among stainless steel producers to move towards ferritic grades and low nickel-content grades; in addition to this there is an increasing availability of stainless steel scrap.
While the report does not specifically call an outright top to the nickel market, it does rather look as if, all other things being equal, that is what it is implying.
Base Metals will continue to show their mettle Raymond James Equity Research is predicting continual strength in base metals prices, although by 2010 the organization predicts a falling back – but even so most will remain above 2005 levels.
Author: Tessa Kruger Posted: Monday , 02 Apr 2007
JOHANNESBURG -
Base Metals prices are likely to continue on a strong trajectory with prices moderating by 2010 on prices in 2006. But the majority of base metal prices will persist well above 2005 averages by 2010 as the mining industry requires several years to develop new supply.
Base Metals and Mining analyst Tom Meyer of Raymond James Equity Research Canada said in a recent report the organisation was "optimistic" on further strength in metals prices and it expected sector valuations to reflect the healthy cash flows and growing cash balances of producers soon.
"With the prospect of rising or stabilising commodity prices and a moderation in inflationary operating cost pressures, we envisage continued strong performance from companies such as First Quantum and Equinox," he said.
The mining industry was a in a very weak position to expand metal supply in the bountiful demand environment as it took at least 10 to 15 years to bring a new resource discovery to production. Therefore, a case could be made for an extended commodity cycle.
Meyer said we were currently experiencing the fifth year of an extended cycle and could therefore expect higher prices in future.
"The present valuation of producers at P/NAV of 0.79 times support the investment case for metal equities at this point. We also believe potential for merger and acquisition activity in the small and mid-capital markets is prevalent this year and could drive valuations upwards."
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