Metals prices have rebounded very strongly over the past two weeks after collapsing in late January/early February, Macquarie Commodities notes. Base metals prices were down almost 20% from their early January peak and have since almost fully recovered those losses. “The latest LME open interest and price data point to the falls in copper being driven by the creation of new short positions while in zinc, lead and aluminium longs were generally liquidated. The rebound was associated with both new longs and some short covering.
“The Chinese year of the tiger is associated with volatility, and this year has started off as promised.
“Nickel fell the least in the sell-off making it the best base metal performer in 2010 to date. Stainless steel demand is recovering globally after seeing cuts in the 4Q09 and anecdotally we are hearing very bullish reports on both nickel and ferrochrome demand in line with this.
“The latest open interest and price data point to the falls in copper being driven by the creation of new short positions (reportedly mainly macro funds) while in zinc, lead and aluminium the sell-off was driven by long liquidation. The subsequent rebound in prices across the complex was associated with both new longs and some short covering. Our view remains that copper prices will remain very strong and move to $8,000/t in the short term, owing to strong Chinese demand and a modest recovery in ex-Chinese demand. Zinc prices are also expected to remain strong in the short term, with the Chinese arbitrage opening, the global auto sector recovery continuing and the potential for significant supply disruption (Red Dog) all set to keep prices high in first half 2010.
“Over the past month we have also noted a gradual up in LME cancelled warrants (metal earmarked for withdrawal from an LME approved warehouse). The rise has been largest in lead and copper. The large spike in lead cancelled warrants to ~15,000t (10% of LME stocks) has occurred in the US (Baltimore) and is difficult to explain from a fundamental standpoint, particularly given the anecdotal feedback from our sources in the US suggest that the lead market is not tight and that demand has not improved sharply over the past month.
“In copper, the rise in cancelled warrants has occurred primarily in Korea and Rotterdam, driven by strong Chinese imports (owing to a positive arbitrage) and a pick up in European demand respectively. Looking into March we expect cancelled copper warrants in Korea/Singapore will pick up as Chinese imports intensify (bonded warehouses in China are fast running down refined copper stock levels, meaning Chinese purchases will need to turn to Asian LME warehouse stocks). High import levels are expected to be underpinned by strong Chinese demand which is being evidenced by a still positive import arbitrage.”