Commodities | Jun 16 2010
By Chris Shaw
Nickel hasn't escaped the selling in the base metals sector over the June quarter, the metal losing close to 30% from its April high of near US$27,000 per tonne.
In the view of Barclays Capital such a downward move would ordinarily suggest a significant weakening in the fundamentals of the market in question, but for nickel the group suggests the opposite is actually the case.
Fundamental data available, which includes current LME inventory levels down 20% from the peak in February and the latest International Stainless Steel Forum (ISSF) stainless production data, indicate the nickel market remains in deficit so far this year.
This leads Barclays to suggest if there is any further easing in the economic uncertainties surrounding Europe and China, an improvement in confidence in combination with strengthening economic data should be enough to deliver some short-term price gains.
This view allows for a moderation in the strength of fundamentals entering the second half of this year, something Barclays expects on the back of a softening in the re-stocking cycle after a very strong start to 2010.
This means no change to the Barclays view the nickel bull story remains intact moving into 2011 and 2012, where it is forecasting respective annual prices of US$25,000 per tonne and US$30,000 per tonne.
There are two key reasons to be bullish on nickel according to Barclays, the first being demand growth is well supported thanks to China's ongoing process of urbanisation and industrialisation. This benefits stainless steel demand.
The second reason Barclays is positive on the metal is continued questions on the supply side, as not only have there been labour disputes, but a number of new projects continue to operate at less than expected levels.
Commonwealth Bank commodities analyst Lachlan Shaw also notes some positive trends in nickel of late, pointing out LM nickel stocks declined overnight by 1,158 tonnes while cancelled warrants remain at a high level at present. He also suggests diminished growth expectations for Europe are at least partly factored into current prices, suggesting downside is somewhat limited.
Looking ahead, Barclays expects the nickel market will be balanced or in deficit in both 2011 and 2012, so any further price weakness in the second half of this year would represent a prime buying opportunity in the group's view.
Standard Bank notes copper especially and many of the other base metals as well display a reasonably strong correlation with the Euro/Yen exchange rate, as this exchange rate is a good measure of investor risk appetite generally.
At present Standard Bank estimates the correlation between copper and the Euro/Yen this year is around 0.46, which suggests copper is not experiencing significant stress despite the ongoing issues in the Eurozone.
For Standard Bank this implies other factors such as improving economic sentiment for the global economy and improving market sentiment, along with expectations of a tighter physical copper market going forward, are of more importance with respect to copper price direction at present.
Separately in base metals, Commerzbank has a few comments on reports this week of mineral deposit discoveries in Afghanistan worth anything up to US$1 trillion. In the bank's view the discovery should not be overvalued, as new deposits generally have a lead time of several years before production is up and running.
This is even more the case in Afghanistan given the ongoing security issues in that country, not to mention the current lack of any significant local mining industry at present. Given these issues, Commerzbank suggests it could be decades before that country produces commodities on any significant scale.
In gold, prices weakened in recent sessions to touch US$1,220 per ounce, since recovering back above 1,330 per ounce. Commerzbank sees the weakness as likely to be short-lived given indications easy monetary policy will remain in place for some time.
The bank notes the San Francisco Fed in the US has suggested the first Federal Reserve rate hike won't be until early in 2012, while the Bank of Japan has announced a new lending mechanism to promote industry activity.
With the European Central Bank also unlikely to hike rates shorter-term, Commerzbank suggests this loose monetary policy could again create inflationary concerns longer-term. At the same time the opportunity cost of holding gold remains low, so the bank suggests demand for the metal should remain well supported.
In oil, Barclays suggests the eurozone issues are not the major driver of prices at present, as of more significance is ongoing strength in non-OECD and US oil demand. In China oil demand growth in May was around 0.7 million barrels per day, while in the US in May oil demand growth increased by almost 1.5 million barrels per day.
This means US demand has increased by better than two million barrels per day so far in 2010, when added to strong non-OECD demand growth early in the year is helping create the basis for a synchronised recovery in global demand in the view of Barclays.
While prices of late have been subject to the competing forces of strong fundamentals and the potential for issues in other markets and economies to impact on demand, Barclays remains firmly of the view fundamentals should ultimately win out. This should see the oil price push above US$80 per barrel.
