High-priced copper remains in play although demand is softening

Copper pushed higher yesterday buoyed by disruptions, although by the close the strike at Cuajone in Peru was lifted, which pulled copper back off the $8,400/metric ton ($3.81/lb) level. However, the fact that copper is now not too far away from all time highs at $8,880 metric ton ($4.03/lb) at a time when the Western world economy is set to slow, highlights the ongoing tight fundamentals.

The week began with most London Metal Exchange (LME) metals ending Monday firmer…credit given to a weaker dollar, higher oil prices, and some fresh short covering; in New York, Comex July copper settled at a three-week high ($3.6655/lb)…August gold was also higher as crude oil hit a record early Monday before easing as the day progressed (so) equities bounced around but closed lower with Dow down 38 points at 12,269.

At mid-week, LME metals were mostly firmer early with copper buying attributed to labor unrest in Peru…aluminum also showed renewed strength…by Wednesday’s close, the complex moved higher but with nickel and lead failing to make any headway…some simply saw the move in base metals as a currency-related bounce in an otherwise oversold market…Comex July copper added nearly 10¢ to close at $3.7475…equities remained on the defensive: the Dow fell 131 points to close at 12, 029.

Although copper is up some 20% since end-2007, confidence has sagged in recent weeks with more than a few seeing further consolidation and price drift ahead. Demand looks lackluster, and without any fresh news affecting the (always sensitive) supply side, sellers seem to have the upper and – for now. A recent forecast offered by MF Global has copper averaging $3.353/lb this year and easing further to $3.13 by 2010…year-to-date, LME cash has averaged $3.65…

Following yesterday’s mostly down day, this morning (Friday) the LME is being paced by copper and aluminum, with the latter reacting sharply to a power-related shutdown at an Alcoa smelter in Texas…[Editor’s Note: LME copper for three-month delivery was $8,415 ($3.82) at noon London time, up from $8,330 ($2.78) at the close on Thursday]. Copper’s upward momentum is in place (for now) despite the fact that the labor situation in Peru has settled down…London gold was last indicated at $905.40/$906.40, up slightly…inflation worries are underpinning bullion…traders expect Comex copper to open several cents higher…yesterday, the July contract closed at $3.7795, up 320 points…

Zinc and lead are sure going through a major correction and consolidation…LME values are down more than 15% and 24% respectively since year end…traders are citing long liquidation along with some fresh shorts that have entered the market…

Latest Battery Council International reports on North American battery shipments has four month replacements at 31.3 million units, virtually unchanged from year-earlier levels…original equipment units at 6.7 million units through April is down 8%.

Barclays Capital’s latest view on global zinc has it moving into surplus with its short term price target now figured at $1,700/metric tons (77¢/lb.) The global surplus is expected to reach some 172,000 metric tons in the second half of this year, resulting in prices that, they say, “will come under further pressure.” Yipes, keep in mind that zinc prices have already retrenched some 60% since the highs reached this past November.

ILZSG (International Lead & Zinc Study Group) reported a global zinc surplus of 78,000 tons over the first four months of this year. LME inventories have increased some 62,650 tons (70%) since end-2007.

And while lead has also been aggressively sold of late, the firm believes that the fundamentals are far more supportive compared to sister zinc…ILZSG’s global lead supply/demand balance placed the statistical shortfall through April at 8,000 metric tons…it is also worth pointing out, however, that LME lead inventories are now at levels last seen in August ’06…some 11,550 metric tons were delivered into LME warehouses on Tuesday alone bringing this week’s total to 96,375 tons compared with 45,475 metric tons at end-2007.

Nickel’s recent bounce back, credited to production problems at BHP Billiton’s smelter in Western Australia, has folks focusing on the reduce supply…the jury, however, is still out as to how much will be lost this year…demand, meanwhile, also remains a bit of a question mark with some analysts rethinking earlier assumptions of a noticeable recovery in global stainless steel demand this year and, consequently, nickel’s overall supply/demand balance. Depending on the size of production loss, the global nickel market could tip towards a deficit, thereby offering fresh incentives on the buy side…

Speaking of nickel’s fundamental picture, the International Nickel Study Group has the market in surplus by 13,700 metric tons in April, and over the first four months of the year, the INSG put the refined metal surplus at 29,100 metric tons.