BASE METALS ON A HIGH

Base metals have recovered from the depressed levels of early June with prices trending higher in July taking macroeconomic cues coupled with rebounding euro, steady growth in global equities, declining inventories, arbitrage opportunity and positive economic numbers gave the rally some fresh momentum. The impact of escalating sovereign debt crisis in Europe and uncertainty over China's efforts to curb excessive credit creation which were the main concerns of the first quarter of 2010 has eased. Increase of world GDP forecasts by IMF to 4.6% in 2010, and promising future for China and India in terms of GDP engulfed metals to maintain firm. The International Monetary Fund lifted China's GDP growth forecast for 2010 to 10.5 percent from the earlier projection of 10 percent which spurred the sentiments.

The Reuters-Jefferies CRB index, which acts as a global benchmark for commodities, hit a 12-week high on the broad-based rally, matching the euro's peak against the dollar. The euro rallied after a reading for the euro zone economic sentiment reached a 28-month high as the euro jumped to 11-week highs against the dollar. The LMEX Index of six industrial metals has gained 21 percent in the past year. Over the few weeks, a run of mixed US data has highlighted the patchy nature of the economic recovery. Copper, aluminium, lead and zinc all bounded to fresh highs since May, while daily warehouse inventory also reported downside.

The metal used in power and construction, rose to a 12 week high in London to $7300, gained more than 12%, and remained outperformer in metals. Stainless steel ingredient nickel, also posted 12% gain, settled above $21,000 on declining inventories. Galvanizing metal zinc and battery material lead prices settled with more than 13% gain with. Lead remained the top performer on LME; prices rose to 11 month high, gained nearly 20% and settled above $2000 against previous level of $1750.

The recovery in demand in western economies has to be viewed in the context of the exceptionally weak post Lehman environment, but nevertheless a sharper than expected rebound has been experienced in many countries. This reflects three main factors–fiscal and monetary stimuli, strong growth in developing countries and increased capital spending in mature economies by a strengthening corporate sector, which has in turn encouraged restocking.

In 2010, the developing country growth story has broadened to the other BRICs and countries such as Indonesia and Turkey. The global automobile sector illustrates this situation very clearly. Despite lackluster growth in developed countries, global car production rose to new historic highs thanks to the exceptionally rapid growth in demand from consumers in developing countries. China is not the only expanding market. Russian, Indian and Indonesian sales in June were up 47%, 22%, and 78% respectively, year-on-year.

COPPER

Macroeconomic uncertainties are forming a natural cap and floor to prices, although the floor has been getting lower. Copper rose to a 12 week high in London to $7300 as remarks from China's central bank fueled optimism about the outlook for demand in the world's largest consumer of the metal. People bank of China said, China has good economic fundamentals, lifted China’s equities to a two month high.

 Copper prices in both New York and London have gained 12 percent through July, focusing on demand both real and anticipated from top metals buyer China and selective U.S. data that signal traction in economic recovery. Technically buying lifted copper to visit highest peak during the month and put the strong support at $5800 on LME and Rs.280 on MCX. On chart, LME copper prices have formed Inverse Head & Shoulder pattern and the level has broken at $6800, which may target $7600-$7800 in two months. And on MCX target would be around Rs.355/kg.

 

 

Falling SHFE and LME copper stocks have provided a positive support to the copper price. Both exchanges have seen copper inventory outflows, with SHFE stocks falling from a high of 189,441t in early May to 104,507t and those in the LME from a high of 555,075t in early March to 415,552t in July. Stockpiles have fallen to 415,525 tons, the lowest level since Nov. 18. They’re down 17 percent this year and headed for the first annual drop since 2004 and stocks have dropped about 24 percent from levels in mid February, suggesting firm demand. Bookings to remove copper from LME warehouses have gained nearly 15 percent, the most since June 14, to 38,550 tons, the highest level since June 2, 2009.On fundamental side, consumption of copper exceeding on improving demand from emerging economies as International Copper Study Group reported, world refined copper consumption exceeded production by 67,000 tonnes between January and April this year, against a surplus of 74,000 tonnes in the same year ago.

One Month expected trading range for LME Copper would be $7800/t-$6800/t.

LEAD & ZINC

Lead, the battery material perceived smart improvement in July month as prices recovered from one year low of $1540/ton. LME three month lead price has outperformed all base metals, rising nearly 19% in July month. On fundamental side, supply side dynamics are becoming increasingly supportive for lead prices as smelter closures due to drought as well as environmental concerns continue to be factors in lead production. U.S. lead demand is much strong than European lead demand because it is far more leveraged to the U.S. auto sector, which has performed strongly. Meanwhile, replacement battery demand accounts for the majority of battery demand in North America.

Reversal in LME stocks builds and expectations of lead-acid battery demand remained positive factors as LME warehouse stocks has provided the greatest support to the price, falling for the first time since early 2009. Stocks last stood at 181,450t in July, down from 193,000 in mid-June. In July, stocks are down nearly 5% on LME.

Chinese imports of lead suggest that the market may push for higher prices. China has been a net exporter of lead in each month from November 2009 to April 2010. This changed in May after it imported 3,144t of refined lead and exported just 1,335t. Chinese car sales have soared and replacement battery demand is likely to rise significantly as China enjoys an unusually hot summer.

LME Zinc prices witnessed smart gain and settled with 14% gain at $2025 against previous level of $1800. In last month prices recovered by more than 13% as prices having fallen near 28% from the start of the year due to euro zone debt crisis.

Decline in Chinese Zinc stockpiles and on warrants data has helped Zinc prices to climb up. LME and SHFE stock flows lend the impression that the glut is easing but only very slowly. Stocks on LME have rose to nearly half percent on lackluster demand. LME stock builds have all but dried up since mid-May, having remained at 620,000 in July. SHFE zinc stocks paint a slightly rosier picture, having fallen from their high of 295,454 in late May to 242,932t in July, but even so they are 47% up from the start of the year. Furthermore the slight slowdown in Chinese demand expected for the remainder of this year, as Beijing reins in its economy, will hit zinc demand due to its large end use in galvanised steel used in construction.

Next Month expected trading range for LME Zinc would be $2180/t-$1900/t and Next Month expected trading range for LME Lead would be $2200/t-$1950/t.

 

NICKEL

The nickel price enjoyed resurgence earlier this year, hitting a high of $27,590/t in mid-April. Since then the price has been trending lower to $19,000/t levels in early July. However during month end prices witnessed smart buying and closed above $21000, with 12% gain.

Nickel prices continued to drift lower through June and this month, weighed by a combination of macroeconomic uncertainties and expectations of a slowing global stainless steel sector in the third quarter. The seasonably slower summer period in the U.S. and Europe contributed to a decline in nickel demand.

Declining LME nickel stocks have lent support to the thesis that nickel demand from the stainless steel sector has strengthened. This certainly seems to hold true for late Q1 and Q2 2010, with LME nickel stocks sliding from a high of 166,476t in early February to 117,498t in July. Stocks are down 5% in last month.

The extent to which the full restart of supply from Vale’s Canadian operations will tip the balance later on this year will depend on the level of demand. The recent tentative settlement between Vale and the year-long striking workers at its Sudbury nickel operations in Canada looks likely to widen the global nickel surplus.

According to estimates of World Bureau of Metal Statistics, nickel was in marginal deficit during first 5 months of 2010. The markets of refined nickel were in deficit of 5000 tonnes in January to May 2010 period as against a market surplus of 48600 tonnes in January to May 2009 period. WBMS said that the inventories for the first 5 months of 2010 were down by 20000 tonnes when compared to last year. Refined production in January to December 2009 totaled 132,670 tonnes and demand was 130,500 tonnes. Mine production increased by 5.7% to 54,600 tonnes. Apparent world demand was 90000 tonnes higher from 2009.

Next Month expected trading range for LME Nickel would be $22500/t-$20000/t.