In a turn of fortunes, nickel was the strongest performer on Friday, though all the metals are down this morning apart from aluminium. With the European political quagmire seemingly worsening over the weekend and Italian bond yields rising, concerns over the potential for the global economy to slip into recession are building again. Given this kind of macro backdrop we favour defensive positioning in the base metals.
We think it will be difficult for October’s short-covering-led gains to be sustained into November and that metals such as copper are most vulnerable should macro sentiment turn further lower. The proximity of aluminium and zinc prices to production costs, however, suggests to us that these metals should suffer less downside in a negative price environment. The latest CFTC commitment of traders data show that non-commercial positions in COMEX copper flipped into net long territory in the week of 1 November. The swing was largely due to further closing out of short positions to the tune of 4.5K lots. Antaike has reported that Chinese carbon anode prices have fallen due to reduced demand from aluminium smelters.
Smelters in some southwest provinces such as Guizhou and Guangxi are reported to have reduced production since late September. The recent weakness in domestic prices is also reported to have delayed commissioning of newly added capacity. North American shipments of replacement auto batteries increased almost 1% m/m in September, but fell 3.8% y/y.
Original equipment batteries (used in new vehicles) by contrast fell m/m but increased an impressive 11% y/y. The market is now approaching a seasonally strong period for replacement battery demand which should provide lead consumption with a fillip. The worsening macro backdrop is unlikely to derail this seasonal upswing, in our view, since the decision to replace a car battery is a function of essentiality as opposed to economic conditions. This is the main reason why lead demand is less correlated to the economic cycle than most other base metals.
Courtesy: Barclays Capital
