Commodities | May 18 2010
By Chris Shaw
While gold is currently at or near record highs, Standard Chartered sees the metal as well placed to withstand any large scale liquidation if global risk aversion levels were to rise sharply.
In support of this view the bank notes speculative long positions remain at acceptable levels despite the recent gold price rally. COMEX data show net speculative long positions now stand at 888 tonnes, which as a percentage of open interest is 33.35%. This is down from 35.5% last week and remains well below the 42% level seen in September of last year and the 36% average of the past 12 months.
Standard Bank notes the risk aversion pressures are at present not confined to equities, as US Libor rates are also rising and this is pressuring money markets. While the rise is not yet substantial the bank suggests if the spread between Libor and the Fed funds rate increases substantially the US dollar will be the main beneficiary. This should support gold in its view.
In aluminium, Chinese authorities appear to be stepping up the fight against overcapacity given the measures announced last week. Barclays Capital notes these measures include a doubling in power prices, which it suggests has raised costs for around 35% of global production essentially overnight.
On the estimates of Barclays, the move could threaten the closure of as much as 2.7 million tonnes of capacity and lift production costs by around 5% to US$110 per tonne. This implies many high cost smelters will be making losses at current prices.
Assuming such closures, Barclays suggests capacity would come back to broadly in line with consumption. This tightening of the market is not expected to last long however, as Barclays notes three to four million tonnes of production are slated to come online over the next couple of years.
The other measures implemented last week were an increase in capital ratio for primary aluminium projects, making it more expensive to build a smelter, and Henan province's refusal to approve any primary aluminium project over the next three years.
While the measures are unlikely to push aluminium prices significantly higher, Barclays suggests they have raised the downside support level for the metal's price and should help bring the market back into balance sooner.
For base metal markets generally Standard Bank suggests support will only be found on the back of better performance by US equities, as this would reflect a turnaround in the attitude towards risk aversion on the part of investors.
Barclays Capital is not as negative however, as while prices have come down it suggests there have been few signs of any weakening in physical market conditions. LME inventory trends remain supportive, so Barclays takes the view fundamentals don't justify the recent price declines.
The faster the euro depreciates the more it could hurt commodity prices according to Standard Bank, with MF Global taking the view while the European Central Bank (ECB) will at some point support the currency, but the ECB is also likely to let the currency move lower first.
Allowing the euro to drop lower would give exports from the region a boost, so lifting growth prospects. But according to MF Global, the fact the euro didn't rally on the back of the European stabilisation package suggests investors remain unsure whether European leaders will be able to tackle deep-seated structural problems in a number of economies.
China is also a wild card in MF Global's view, as any sign of that economy slowing down could result in more protracted damage to metals markets. A pre-emptive tightening of monetary conditions could prompt increased concerns about China, though the analysts suggests a revaluation of the yuan is a possible next step.
This would be viewed positively and could spark a rally in most markets according to MF Global as it implies a bias towards higher Chinese consumption. The order of any policy change will be important in the group's view, as if the currency is revalued prior to a rate hike it should be bullish for commodities, but if the reverse occurs another sharp down leg across the commodity spectrum could be in store.
From a technical perspective MF Global sees support for copper at US$6,632 per tonne and resistance at US$7,500 per tonne, while in aluminium support and resistance points at present are estimated to be US$2,050 per tonne and US$2,250 per tonne respectively.
In zinc MF Global sees support at US2,000 per tonne and resistance at US$2,200 per tonne, while for lead support is at US$1,871 per tonne and resistance at US$2,200 per tonne. Nickel's support and resistance points are estimated to be US$20,000 per tonne and US$24,800 per tonne respectively, while for tin key price points are US$17,000 and US$18,700 per tonne respectively.