UBS Analyst Examines Base Metals Volatility
By Lindsay Williams
16 Jan 2007 at 08:53 AM EST
resourceinvestor.com
JOHANNESBURG (Business Day) -- Classic Business Day gets metals strategist Robin Bha from UBS Warburg on the line from London about the volatile global commodities and base metals markets.
LINDSAY WILLIAMS: There is always something going on in the copper and aluminium markets - even during flat times the market goes into serious backwardation, and some Japanese trader gets “done” for trying to corner the market, disappears and gets found in Bali two years later. It’s always very exciting. Robin, what’s been happening?
ROBIN BHA: You’re right, there’s never a dull moment in terms of the commodity markets and specifically base metals. We are seeing a lot of volatility because these markets are all very tight, and they’re all fairly balanced in terms of supply and demand - any one factor that shifts supply or perceptions about supply, or shifts perceptions about demand or the level of inventories can have an undue impact on prices.
LINDSAY WILLIAMS: What’s been happening with aluminium? That seems to be in the news with talk of a squeeze and massive backwardations - what’s been going on?
ROBIN BHA: Yes, that does appear to be so - if you look at some of the London Metal Exchange (LME) data that comes out in terms of concentrations of large positions, and even short positions - there is a large position in the market that has a fair percentage of the LME stocks. LME aluminium stocks amount to almost 700,000 tonnes of metal - on the face of it that’s a lot of metal, so if you can tie that up and try and squeeze the market as this particular long player appears to have done then you can underpin or support prices in this manner.
LINDSAY WILLIAMS: The article here from Reuters in which you’re quoted says: “One player had built a dominant position on the London Metal Exchange, and now controls around 70% of the stocks in LME warehouses which amounted to almost 700,000 tonnes.” There was also a large short position which obviously means that someone is betting on the price going down of around 920,000 tonnes for delivery in just under three months - what does that actually mean? Does that mean that we’re in a very dangerous situation where we could get a similar scenario with what happened with platinum a couple of months ago where the price spiked out control?
ROBIN BHA: That would be one conclusion - as is always the case there’s always more than one answer. The simple answer to your question is we could get a similar situation to what we had in platinum where prices are squeezed higher, and then fall dramatically days after the squeeze is over - but it’s interesting because if you look at the data you could also come to the conclusion that the large long position in January and the large short position in March could be related, and there’s the suspicion that this represents a spread position where the same entity or player has both the long position and the short position in March.
LINDSAY WILLIAMS: It sounds very expensive to have both a long and a short position, and it also sounds to me without getting too technical that they may have locked in a loss. It’s going to be interesting the way it all unwinds in the next couple of months. What about the fundamentals? Looking at something like copper that was $8,000 not so long ago - the analysts and technical analysts I’ve spoken to were talking it up to $12,000 per tonne, but it’s now falling back and I think it’s down 10% in the first couple of weeks of this year. What do you make of it?
ROBIN BHA: The fall in prices was associated with a perception that I think is correct that the market is less tight - there does appear to be more copper available in the physical market, and consumers continue to buy on a hand-to-mouth basis because prices are so high they can’t finance large inventory holdings - so there’s a real sense that compared to six months ago and compared to a year ago there’s more copper is available, and that’s why we’ve had this slide in prices. I think that this slide is overdone - I don’t think the fundamentals are as bad as some would make out, and the market is still roughly balanced. We could get some surprises on the demand side - people do appear to be too bearish about the U.S. economy and I don’t think it is as bad as people make out, and secondly we’ve seen a lot of supply disruptions in the last few years affecting copper production. What’s to say that’s not going to happen over the coming weeks and months? China is now the world’s biggest consumer of copper and they haven’t been buying as much as before, but that could change following the Chinese New Year in middle of February - we could well see China coming in and demand from that area rebounding quite strongly.
LINDSAY WILLIAMS: There was some talk last year of LME copper stocks being so low that somebody with a lot of money and a bit of spare time on his hands - someone like Roman Abromovich, who might get bored with Chelsea - might be able to corner the copper market. Has that situation eased? Is that what you are saying?
ROBIN BHA: One is still able to buy up the stocks at the right price, but you would have to buy a lot more today than you would have had to have done a few months ago or a year ago because there’s more copper now in the warehouses - so it’s not impossible, but it will obviously be more expensive today because there is more of the metal available.
LINDSAY WILLIAMS: Despite the fact we like to think we are becoming terribly sophisticated and diversified, we are still very much a commodity based economy here in South Africa - what prospects does 2007 hold for this economy do you think?
ROBIN BHA: I think the prospects are pretty good. I would have to say that for any resource rich country such as South Africa - also countries like Canada and Australia that are producing invaluable commodities - they’re going to reap the rewards. We still have prices in 2007 that are way above the historical average, therefore in terms of revenues to the producing companies I think it’s still very good news.
LINDSAY WILLIAMS: If you could pick one commodity that will stand out for you over the coming 12 months what would it be?
ROBIN BHA: I think it has to be zinc. |
