Material Matters: Copper And Gold In The Spotlight

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By Chris Shaw

With the European Union coming up with a financial rescue package for Greece, Barclays Capital notes metals markets have responded positively as the US dollar has weakened and equity markets have moved higher.

The major beneficiaries have been gold and copper, the former in part given its inverse relationship with the US dollar. As well, Commerzbank suggests the Greek rescue package has temporarily boosted the euro, which indirectly is a positive for the gold price.

As gold has moved higher in recent sessions the precious metal has brought about renewed technical interest, Commerzbank noting the gains have moved the price of the metal above the recent trading range. As evidence of this, Barclays notes speculative investors have increased their exposure across the precious metals complex in the early part of April. Net fund length in Comex gold rose by 29,700 lots in the week ending April 6th.

What should also provide support for gold, notes Standard Bank, is while a deal has been reached to rescue Greece there remain debt problems throughout the EU region. This suggests ongoing financial issues, an environment positive for gold given, as ANZ head of commodity research Mark Pervan points out, the metal remains a safe haven investment.

Pervan is forecasting a gold price of US$1,150 per ounce at the end of June and US$1,100 per ounce at the end of the year, while Citi expects prices will end June at US$1,114 per ounce and December at US$1,135 per ounce.

For copper additional support has come in the form of stronger economic data, Barclays noting preliminary Chinese trade data showed imports of unwrought copper and products jumped 42% in month-on-month terms to 456,000 tonnes. This is the second highest level on record.

As Commerzbank notes, the data mean China's hunger for commodities has not yet abated. As well, Standard Bank notes copper is entering a seasonally strong demand period, which could offer an additional boost to the demand side of the market.

But with prices not rallying much on very bullish sentiment and other supportive factors, Commerzbank makes no change to its view most of the positive news for metals has already been priced into the market. This leads it to suggest risk is to downside at present.

ANZ's Pervan agrees the base metals look fully priced, though he suggests the elevated price levels appear justified given China's March trading data. Given the move into a seasonally stronger demand period, Pervan agrees with the view of more upside than downside pressure for prices.

Short-term Pervan sees scope for copper to move higher, forecasting a June quarter price of US$3.65 per pound, up from US$3.52 in the March quarter. By the end of the year, however, he expects copper to be trading at US$3.30 per pound.

The other metals are expected to follow a similar pattern, Pervan forecasting aluminium prices of US$1.01 per pound in the June quarter and US$0.95 per pound by year's end, while nickel is forecast to trade at US$10.50 per pound this quarter and US$9.50 by the December quarter.

For zinc Pervan expects a June quarter price of US$1.07 per pound and a December quarter price of US$1.03, while for the same periods he expects lead prices of US$1.02 per pound and US$1.05 per pound. His tin price forecasts are US$8.10 per pound and US$7.90 per pound respectively.

Among the base metals, Citi favours copper, though upgrades to its metals prices forecasts have followed a further review of market conditions. In contrast to ANZ, Citi expects base metal prices will strengthen through 2010, its copper estimates now standing at US$3.40 per pound at the end of June and US$3.63 at the end of December. This reflects 6% and 4% increases to respective forecasts.

For aluminium, Citi has lifted its estimates by a similar amount to US$1.01 per pound and US$1.07 per pound respectively in June and December, while for nickel it is forecasting prices of US$0.10 per pound and US$0.11 per pound respectively. For zinc Citi expects prices will end June at US$1.05 per pound and finish December at US$1.08 per pound.

In terms of copper exposure, Citi has PanAust ((PNA)) as the pick of the sector as the stock is currently trading at a discount to the broker's estimate of net present value, so generating a Buy rating. OzMinerals ((OZL)) is also rated as a Buy, though Citi says the stock needs a catalyst to generate some share price movement. Citi rates Equinox ((EQN)) as a Hold, seeing some risk to consensus production estimates.

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