FOCUS:Base Metals May Fall Further Before A Floor Is Found
DJ FOCUS:Base Metals May Fall Further Before A Floor Is Found
By Elisabeth Behrmann
Of DOW JONES NEWSWIRES
metalprices.com
SYDNEY (Dow Jones)--With base metals enduring another round of sustained
selling in a market gripped by worsening fears of a global slowdown, the
emerging consensus appears to be that prices have to fall much further before
real demand returns.
London Metal Exchange copper fell 7% in overnight trading, dropping to $5,465
a metric ton, the lowest level since February 2007, as the impact of the
ongoing financial crisis continues to send shock waves through the broader
economy.
The U.S. $700 billion bailout plan has failed to gain much traction,
overshadowed by bearish economic data in the U.S and other key economies while
U.S equities have fallen below the 10,000 point mark for the first time in four
years.
However, expectations of coordinated action by central banks, primarily in
the form of interest rate cuts, continue to offer a glimmer of hope for
battered sentiment, traders said Tuesday.
In a surprise move Tuesday, the Reserve Bank of Australia cut interest rates
by 100 basis points to 6%, the biggest cut since May 1992. Analysts were mostly
forecasting a cut of 50 basis points.
Australian equities shot up after the move, with BHP Billiton Ltd. (BHP) up
4.3% after trading in negative territory earlier in the day.
But for now, jittery sentiment and further de-leveraging is expected to
continue, pointing to further losses in commodity markets, even while some
metals such as copper grapple with historically low stocks and a string of
supply disruptions.
"Copper could easily trade below $5,000/ton in the near term and
realistically trade into the mid-$4,000/ton area," if Chinese policy makers
fail to come up with a significantly positive stimulus package, said Michael
Jansen, an analyst with JPMorgan.
Around 0440 GMT, London Metal Exchange three-month copper was trading at
$5,600/ton, up $40 from Monday's close, but down 37% from its July peak of
$8,940/ton.
Base Metals Most Exposed To Industrial Slowdown
But with base metals being the most leveraged to industrial production,
demand is the key factor in the current environment, not supply, Jansen said,
adding the level of LME stocks will not support copper prices for now.
Not surprisingly, copper has shown very little reaction in recent days to
news of a strike at Xstrata Plc's (XTA.LN) 125,000-ton Kidd Creek copper mine
in Cerro Verde in Peru.
"The market is looking somewhat beyond China right now, looking at the
broader picture that is suggesting a slowdown. I expect prices to stay
subdued," said a Hong Kong-based trader.
In its latest report, Barclays Capital said it has revised its 2009 copper
price estimate to $6,500/ton from an estimated average of $7,351/ton this year.
Gold on the other hand has benefited from the move to safe-haven assets as
investors flee plunging stock markets. Gold rose despite a rise in the dollar
against other major currencies.
At 0445 GMT, spot gold was trading around $863 a troy ounce, up $7.70 on the
New York close, adding to a $25 rally overnight.
But gold could also come under pressure if more central banks join the RBA in
cutting rates, in a coordinated move to unfreeze inter-bank lending rates and
boost economic sentiment.
"Central banks are expected to cut rates, so for me, gold at $900/oz or
$920/oz would be a selling opportunity," said a Tokyo-based trader.
How Much Further Before The Floor Is Found?
Given the rut in base metals prices, market participants have been left
wondering how much further prices should fall before a floor is found.
Falling prices have already forced mine closures in zinc and nickel, two of
the worst-performing LME-traded metals this year.
Aluminum is also at or very close to this perceived 'line in the sand,'
Barclays Capital said in a note.
"However, the marginal cost level is not a definitive 'line in the sand' that
prices won't fall through," Barclays said. How long prices spend below that
level also depends on market surpluses and stocks, it said, picking zinc and
nickel as enduring weak performers.
Copper is trading furthest from marginal costs, implying it has the most
downside among all of the metals, said Barclays, but added low inventories and
a continued supply shortfall should prevent copper from falling to cost-support
levels.
Some analysts are even more optimistic.
"Obviously there is a lot of pessimism, so we can't rule out a move lower (in
copper) but I think it's about done," another Hong Kong-based trader said.
"I don't think copper should have a four in front of it, so I see it forming
a base between $5,200/ton and $5,400/ton. It can turn very quickly, the market
is very, very short. The risk is to the upside," the trader said.
(James Campbell in Singapore contributed to this report)
-By Elisabeth Behrmann, Dow Jones Newswires; 61-2-8235-2965;
elisabeth.behrmann@dowjones.com
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(END) Dow Jones Newswires
10-07-08 0111ET |
