Rudi's View | Apr 20 2011
By Rudi Filapek-Vandyck, Editor FNArena
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True story. Earlier this week, I was discussing the immediate outlook for commodities with a few FNArena subscribers. When I pointed out I had already made the call for a correction before Goldman Sachs caught global headlines, one of them responded: "Noted Rudi, although with great respect, you are not “a great vampire squid wrapped around the face of humanity".
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It should be clear by now that yesterday's outperformers have ran into a mix of opposing trends and market developments. This now has made the following statement a very popular one among analysts in the sector: expect more headwinds for the next three months.
The strongest argument as to why commodities had once again rallied too quickly, too far by late March/early April comes, in my view, from the hand of analysts at JP Morgan who, unsurprisingly, have subsequently turned "quite bearish" on the sector for the next three months. That too was before Goldman Sachs finally decided to go short on the sector, also on a three months' view.
Usually, the annual seasonal pattern for crude oil prices gets a lot of attention here and there. What is less often reported is there are also strong seasonal tendencies for other commodities, such as for copper. JP Morgan analysts, who'd had grown wary of copper's outlook from the moment US$10,000/tonne came in sight, observed this year's underlying demand indicators were not "as usual" and this caught their attention, ultimately leading to a "quite bearish" view on a short term horizon.
In a typical year for copper, the first half is in deficit and the second half is in surplus. This means that copper inventories at the LME have a tendency to peak in late February and then start rolling off to a seasonal bottom in June/July, after which the trend kicks in an uptrend gear again towards year end. That's the normal pattern. This year, however, LME inventories in copper are still rising in April.
To make matters worse, this observation comes on top of the fact the Q1 period suggested a market surplus of somewhere in the magnitude of 100k-150k, while a flat outcome would have been in line with traditional patterns. Putting one and one together then led to the following conclusion: "the peak period of consumption is now, yet LME inventories are still increasing and the market built up more inventory than usual during Q1". Hence the "quite bearish" call.
All this comes on top of an argument being used elsewhere (and about which I have reported earlier): Chinese authorities are still reigning in liquidity. It was JP Morgan's observation that "credit has become uncommonly tight in China".
The counter-argument to all of the above is that end-users in China have used peak prices in copper during the months past to actively sell and trade their own inventories. This is the ultimate argument from those experts with a bullish view on the sector: the end users will at some point have to return to the market and start buying again.
This is why Citi (another expert who turned "cautious" on the sector recently) issued a report this week, titled "Short Term Cautious, Medium Term Positive".
This is also why JP Morgan analysts forecast the price of copper will return to US$10k by the fourth quarter this year.
Happy Easter, happy trading!
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Special Note: I opened a twitter account this week which allows me to follow "tweets" by the likes of the Financial Times and Nouriel Roubini on a daily basis. In addition to my stories on FNArena, I will increasingly use Twitter to post additional observations and insights. Here's what I posted a few hours ago:
"Observation: a majority of big fund managers anticipates a repeat of 2010's pattern, suggesting a peak for equities is in, for now."
To start following my tweets, look for @filapek
You are all invited to join.
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(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)
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