DJ FOCUS: Funds Back Base Metals But Ignore Warning Signs
By Andrea Hotter
Of DOW JONES NEWSWIRES
futuresource.quote.com
LONDON (Dow Jones)--The funds are back in the base metals markets with a
vengeance, but this time they're playing the dangerous game of choosing to
ignore the subprime tremors effecting the world's biggest economy in order to
play up the positive.
Their focus of attention this time is China, where exceptionally strong
growth figures provided the impetus for a revival in interest this week. That's
understandable to some extent because China is the world's largest consumer of
metals and demand there continues to expand at a rapid pace, as 11.9% growth in
the second quarter indicates.
But with U.S. Federal Reserve chairman Ben Bernanke warning that the fallout
from subprime mortgage problems will entail significant financial losses,
analysts said the return of the funds to the metals markets is a risky play
that will end in tears.
"The bias is favored on the positives, with the funds playing down the
negatives in the U.S. economy despite the fact that the U.S. economy is still
three times bigger than China's," said Jon Bergtheil, London-based analyst at
JPMorgan.
"It's a double-edged sword, because when the funds get comfortable with China
then they enter the metals markets, and flavor their optimism to focus on this
and not poor U.S. housing starts and automotive sales, which are the two
biggest consumption areas for metals," he added.
The level of impact the funds can have when they recommit to the base metals
has been clearly illustrated this week.
Tin and lead, the two metals that until this year were traditionally viewed
as slumbering through the average trading day, have both been dominating
activity and hit record highs this week. Although short-term supply problems
have been boosting lead, it's tin's gains that are being attributed to fresh
technical buying by largely speculative players.
And the other base metals are riding higher on their coattails, including
nickel, which had been falling like a stone since mid-June.
"This is a runaway bull market, with a focus on the bullish spin," said
Stephen Briggs, London-based analyst at Societe Generale. "At the end of the
day, who's going to stand in front of an express team," he added.
Briggs said the hedge funds appear to be "picking the metals off one-by-one."
"It's tin's turn right now, with a couple of funds reported to be squeezing
the market, which isn't difficult once they get their teeth into it because
it's about 1% the size of aluminum," he said.
"And clearly now, with lead, copper and tin all firmer, the question has to
be when will it be the turn of aluminum," he added.
Tin has gained 11% this week and a massive 59% since January, while lead has
been the star performer, gaining a stellar 15% this week and 131% since the
start of the year. In contrast, aluminum has held in a very narrow range either
side of $2,600 a metric ton for most of the year.
UBS analyst Robin Bhar said the firmer tone to the base metals has come about
almost as a "self-fulfilling prophesy. When the market starts to talk about
higher prices there's usually only one way for prices to go."
But how much longer the funds' bullish influence lasts remains to be seen.
The end for the rally may not be as close as many brokers think, given that
funds have stale dominant long positions and are unlikely to go short at any
point soon. Several hedge funds are even tipping tin prices - currently around
$15,000/ton - to exceed nickel, a market that rocketed to near $52,000/ton in
May.
Further forward, however, the funds aren't so bullish, with many calling the
2008 Olympic Games in Beijing as being the end to the current cycle due to a
contraction in Chinese demand.
"Already funds seem to have run nickel prices to extremes, lead is
following, tin has taken off, so you have to ask which metal is next," said
BaseMetals analyst William Adams. "The main concern we have about being bullish
is if sentiment gets hit for six, by something such as a meltdown in the
dollar," he added.
-By Andrea Hotter, Dow Jones Newswires; +44 (0)20 7842 9413;
andrea.hotter@dowjones.com
(END) Dow Jones Newswires
07-20-07 0646ET |
