FOCUS: Base Metals May Rise Going Into Year's End

21 November 2012, 9:22 a.m.
By Debbie Carlson
Of Kitco News
http://www.kitco.com/

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(Kitco News) - Base metals prices may rise going into the year’s end, even as the macroeconomic outlook is cloudy.

Copper’s rally on Monday on hopes that the U.S. might avert the “fiscal cliff” – the pending tax hikes and spending cuts that go into effect Jan. 1 if not reversed – might be a sign of further gains to come, market watchers said.

After falling much of October, base metals prices could be bottoming out, said Michael Turek, senior director on Newedge’s New York metals desk.

“I’m not a rampant bull; I’m not beating up anyone to buy base metals, but I’m favorably disposed to them,” he said, adding that the current price action bodes well for gains.

“They’ve absorbed a lot of (negative news),” he said.

The possibility of the fiscal cliff being resolved is a positive sign for those looking for higher prices. Plus, he pointed out, the new political regime in China could mean more capital investment. “We’ve seen signs in the last few days of raw material buying out of China,” he said.

Markets have been caught up in worries about a slowdown in the Chinese economy for the past several months, and there could be signs that the slowdown in growth might be ending.

Bill O’Neill, principal of LOGIC Advisors, said he expects base metals as a whole to begin rising going into next year.

“I like copper. We see really the potential for a solid performance next year. It had been reacting to slightly higher LME (London Metal Exchange) and Shanghai (Futures Exchange) stocks, but the overall pattern of demand is starting to improve,” he said.

Both O’Neill and Turek said base metals may also benefit if Shinzo Abe, head of Japan’s Liberal Democratic Party, the opposition party, wins next month’s parliamentary election. Abe has fueled speculation that more monetary easing may be on tap if his party is successful in the elections.

“There could be accommodation by the BOJ (Bank of Japan) now that Shinzo Abe might become prime minister. The European Central Bank may do more easing. Dr. Bernanke sure is not backing away from accommodating,” O’Neill said, referring to Federal Reserve Chairman Ben Bernanke and the Fed’s third round of quantitative easing.

Going into 2013, Stephen Briggs, senior metals strategist at BNP Paribas, said central bank action and expectations of greater demand growth should support base metals, even as Europe’s economy struggles. The firm forecasts global base metals demand growth will rise 5-6% in 2013.

Although BNP Paribas looks for strength in base metals next year, it lowered its fourth quarter 2012 and first quarter 2013 price outlooks for aluminum, copper, lead, nickel, tin and zinc from previous forecasts after price weakness earlier this year. Using LME prices as a benchmark, their new outlook calls for aluminum’s first-quarter price to average $2,075 a metric ton, copper to average $8,275 a ton, lead to average $2,365, nickel to average $17,225 a ton, tin to average $22,700 a ton and zinc to average $2,030.

Although BNP lowered its price forecasts from previous levels, their new outlook suggest prices will rise from current levels. Around 9 a.m. EST Wednesday, three-months LME aluminum was at $1,943, copper was at $7,726.50, lead was at $2,153, nickel was at $16,600, tin was at $20,625 and zinc was at $1,922.75.

O’Neill and Turek said they see higher prices for copper. O’Neill said copper futures on the Comex division of the New York Mercantile Exchange could trade into the $4 a pound area from the early-Wednesday price of around $3.5060, basis the December contract.

Turek said overall he expects LME base metals to be higher at year’s end versus current levels and said if LME copper dips below the $7,700 area, near where it is now, that level offers a good value for end users to pick up supplies. “I wouldn’t be surprised to see (LME) copper with an eight as the front number in the coming months.”

DIFFERENT VIEWS ON WHICH BASE METAL MAY OUTPERFORM

There will be some divergence in the sector, Briggs said, as some metals will do better than others. Copper will come under pressure as it moves into a modest surplus in 2013. “The deep-seated difficulties of the copper-mining industry are far from over, but a combination of new mines, expansions and improved performance at some key existing plants should finally lead to strong production growth in 2013-14,” he said.

The firm’s two favorite metals are lead and tin. Production of tin is unlikely to grow much next year and lead may move into supply deficit in 2013, BNP Paribas said.

Turek and O’Neill, meanwhile, differed from Briggs. Both said they see copper having leadership qualities next year. Turek specifically pointed to the supply problems that have plagued the market as something that will persist. “We talk a lot about demand in copper, but the international supply dynamic (is important). Quality mineable deposits are expensive to access,” he said.

Aluminum’s outlook is unlikely to change anytime soon. World smelter capacity will remain ample and despite price falls, producers are not cutting back, Briggs said. Zinc production capacity also remains ample, but that could change later, although not until late 2013-14 when some key mines are depleted, he said.

While these market watchers have a positive outlook for the base metals, both O’Neill and Turek said the speculative interest in base metals remains light. O’Neill pointed out that speculative traders in the weekly commitment of traders report from the Commodity Futures Trading Commission have turned net-short in copper the most recent data. He said that’s been in the trend in commodities lately.

“The hedge funds have completely abandoned copper and commodities in general…. Some commodities are down because of fundamentals, but a lot of it is money flow…. The risk-off mentality is hitting copper. The higher dollar is a factor too,” O’Neill said.

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By Debbie Carlson of Kitco News dcarlson@kitco.com

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