Selling activity in base metals

After a period of uncertainty during the first half of the year, the recent trend has been one of rising copper prices coupled with rising open interest - suggesting new long positions are being added regardless of near-term demand concerns.

The base metals had an unusual start to the week, trading sideways for much of Monday, before a flurry of selling activity emerged towards the close. Aluminium was the only metal to avoid the sell-off, rallying instead to finish the day on its highs. Tuesday morning has been a rather mixed picture, with a continuation of yesterday’s selling activity being partially offset by movements in the dollar.

Gold has run into strong resistance yesterday. While we believe the metal will test the $1,110 level again soon, we would also not look to add new longs at current price levels.

Front-month WTI crude rallied strongly during Monday afternoon, helped by a weaker dollar, before prices softened slightly late-on. Ultimately however, crude oil prices remain rangebound, with WTI stuck firmly in a $77-$82 range. Vols have declined significantly as a result and arguably are starting to look cheap.

Most of the excitement in zinc came right at the end of the day, with the metal coming under heavy selling pressure during the final PM Kerb trading session on the LME floor, with the price falling around $60 before picking up slightly and stabilising during the aftermarket. Zinc has since come under further pressure this morning, with the metal taking direction from a weaker copper price.

After trading sideways for much of Monday afternoon, copper was also sold aggressively on the close. The market absorbed the selling relatively well, however prices have since come under further pressure this morning. The lack of upwards progress appears to have shifted focus back towards the bearish arguments regarding copper, while a 4,725 mt increase in on-warrant LME inventory - the majority of which entering Asian warehouses once again - has also weighed on sentiment.

As noted last week (see the Focus section of the Commodities Daily on Friday 6th November), the physical demand picture in China, on the surface at least, looks rather poor at the moment. Adding a bit of fuel to the fire is a Bloomberg story this morning citing Xi’an Maike Metal International Group as saying China may start re-exporting copper, and that the firm itself had diverted bonded material from China to LME warehouses in Asia, due to a lack of buying interest. Overall however, the metal remains caught up in a battle between participants with a short term view looking at the weak physical picture, and those expressing a longer term view, looking towards the general economic recovery and tightening fundamentals towards the end- 2010 and in 2011.

In contrast to copper, aluminium has performed much better, attracting buying interest towards Monday’s close and finishing the day on its highs. The light metal has since continued to rally heading into the afternoon, boosted by a 3,925 mt fall in onwarrant inventory.

Elsewhere, Nickel, after a poor close yesterday, has come back under fairly sustained pressure this morning, with prices heading below $17,000. Lead has also seen Monday’s selling pressure spill over into the morning session, however prices have bounced from their lows. Tin meanwhile has had a much busier time than in previous days, with the metal breaking free from the rest of the complex and rallying, in spite of a 405 mt increase in on-warrant LME stocks.|

Courtesy: Commodities Research, Standard Bank