M/Metals Prospects
Commodity Conviction Test
1 May 2008 - 39 pages
* The Dollar: Determinism or distraction- - M/Metals are entering a critical
period, where physical/fundamental support will be tested by the unwinding of
the commodity reflation trade. Expectations for a floor in the US dollar
have induced speculative exodus. Yet, the M/Metals rose for 3 years before
the dollar started seriously weakening, and there are other "big wheels
turning."
* Seeking fundamental support - Coming weeks will reveal the price points at
which physical demand re-kindles. It will be important to scrutinize futures
curves and speculative positions. With distributor and user holdings thin,
this response will likely be rapid. We expect Copper to be supported above
$3.40/lb and Aluminum above $1.20. The dollar effect is arguably less in
Iron Ore, Steel, and Coal, which have been strongest. This suggests
speculative premia are modest.
* Cooling-off period- - Given hyper-compressed events in 1Q/08, M/Metals are
likely to be subdued for some time, given: Exhaustion of the commodity
momentum trade after heady runs in Copper, Gold, Steel, and Coal; The floor
in the dollar driving profit-taking, which is hitting the equities harder
than the commodities; Likely further demand-side deceleration, particularly
in Europe; and Scant production growth or cash-distribution catalysts from
earnings.
* Recommendations - Accumulate Top Pick FCX in Copper on weakness; Pair trade
NUE vs. integrated mills in Steel; Focus on Aluminum in 2H/08. Coal and
Steel margins likely to lag. Gold drivers intact, but dollar hurts during
seasonal slack. |
