Metals ended last week on a very strong note, pushing higher on the back of a weaker dollar, which plunged to fresh 2009 lows against the Euro. Copper was up 4% on Friday, and there were good gains in the rest of the metals as well. However, Reuters points out that despite the robust week copper had, (up 3.6%), its performance thus far in May (up 4% on the month), was its weakest monthly gain since January. We suspect that the arc of the copper rally is leveling off as markets are coming to grips with the fact that the Chinese restocking program will eventually run its course, and that more disturbingly, other sources of demand have not surfaced in sufficient quantity to take its place.
Friday's advance spilled over into the Shanghai session yesterday, but we are seeing modest weakness in the current session. The declines are attributable mainly to currency influences, as the unexpected testing of a North Korean nuclear device-- some twenty times stronger than the first one the North Koreans tested earlier-- sent the dollar sharply higher yesterday, particularly against the yen, which fell to two-month lows against the greenback. Also weighing on metals, is a sharp drop in oil prices caused by Saudi comments over the weekend that the cartel will likely "stay the course" as far as quotas are concerned. This, in effect, means that the group will once again rely on increased compliance to tighten supplies, a strategy first tried after their last meeting, but one that did not result in significantly denting oil inventories. US equity futures are called to open modestly lower as well, adding to further pressure on metals today, but it is currency and oil that are having the most impact.
It will be a fairly busy week on the US macro front. We get the S&P home price index out later today (expected at -18.4% for March), as well as May consumer confidence readings (expected at 42, up from 39.2 in the month prior). April existing home sales comes out tomorrow (expected up 4.65 million units), while Wednesday brings us April durable goods readings (expected at +.5%). New home sales for April also come out on Wednesday (expected at 363,000 units), although the statistic will not be as important as the existing home sales indicator. Finally, we get the first revision to first-quarter GDP on Friday, where a decline of 5.5% is now expected versus the initial reading of -6.1%. We also get May Chicago PMI (expected at 42, and slightly higher than the previous reading), as well as Michigan consumer sentiment readings for May (expected at 68, and pretty much unchanged from the previous month).
Elsewhere, it was reported yesterday that German business confidence rose for a second month in a row in May, with the Ifo institute saying that its business climate index increased to 84.2 from 83.7 in April. However, offsetting that somewhat, was a report out earlier saying that European industrial orders declined for an eighth month in March. Out of Asia, South Korean consumer confidence rose in May to its highest level in almost two years on optimism about government spending, tax cuts and interest-rate reductions.
Lastly, we present at the end of today’s note an informative 32-page report written late last week on prospects for the major mining companies, as well as a side discussion on the price outlook for some of the base metals. Tobias Woerner, our building and mining equity analyst, along with his London-based colleagues, Andrew Gardner and Olivia Peters, prepared the report, which we hope readers will find of interest.
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COPPER SUPPORT: $4300 / RESISTANCE: $4925
We are currently at $4560, down $50. LME inventories were down again today, but not doing much to stem the selling, as markets are concerned about the duration of the Chinese stockpiling program. In fact, Reuters is running a story saying that China’s State Reserves Bureau has quietly sold off a small volume of its imports over the past month and might sell up to 50,000 tons in all. The last time such reports gained currency, we saw a rather abrupt, but short-lived selloff. However, our charts show that for the moment, the technicals seem to be in good shape, with prices still within their upchannel, although a series of lower highs seem to be in place.
* Harbinger Capital, one of Asarco LLC's largest bondholders, has put forth a $500 million reorganization plan for the copper miner. Grupo Mexico has made a $1.55 billion competing offer and wants the court to allow creditors to vote on its reorganization plan.
* Doe Run Peru said it would be difficult to complete the mandatory environmental cleanup at its La Oroya smelter by the October deadline. The government could cancel the smelter’s work permits if the company fails to meet the deadline and is not granted another extension. "The process is much more complicated than what we had expected," said one executive.
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ALUMINUM SUPPORT: $1450 / RESISTANCE: $1650
We are now at $1446, up $4, and basically where we were at this time on Friday. Clearly, the market is struggling to move higher, no doubt weighed down by hefty LME inventories. Stocks were up by another 10,000 tons overnight. Our charts show that the recent short-term upchannel that has been in place since mid-March is now broken, and prices could therefore find themselves under further pressure in the days ahead themselves
* Western world unwrought aluminum stocks fell to 1.421 million tons at the end of April, compared with 1.537 million in March and 1.580 million seen in April 2008, this according to the latest figures supplied by the IAI. Total aluminum smelter stocks excluding finished end-products fell to 2.587 million tons at the end of April versus 2.738 million in March and 2.862 in April 2008.
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ZINC SUPPORT: $1430 / RESISTANCE: $1712
We are currently at $1495 on zinc, down $22/MT. Our charts show that the recent short-term move higher seems to be stalling, as prices compress within a very narrow trading range. The $1430 level is a key support level to watch, as it lies along the short-term upchannel, and also marks a series of recent intraday lows.
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LEAD SUPPORT: $1380 / RESISTANCE: $1570
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We are at $1410 on lead, down $29; lead’s short-term advance seems to be over, as prices are starting to consolidate within a sideways band. The $1380 level marks key support-- it was tested earlier today, but held.
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NICKEL SUPPORT: $10, 600 / RESISTANCE: $13,570
Nickel is at $12,750, down $40. Prices had a good move higher on Friday, but are retracing slightly right now. Chart suggests that we could likely head back lower into the trading range.
* Global crude steel production fell 23.6% year-on-year to 89.5 million tons in April, this according to latest figures furnished by the World Steel Association showed on Wednesday.
* Rio Tinto and Nippon Steel agreed to cut iron ore prices by a third in this year's first contract negotiations, increasing pressure on China's mills to accept the same. However, miners may find it tougher going with the Chinese, as companies like Baosteel are holding out for reductions in the 40%-50% range.
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TIN SUPPORT: $10500 / RESISTANCE: $15500
We are at $13,600 on tin, down $50. Charts look toppy, and suggest that we could work slightly lower from here.
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