Volatility lays bare the perils of tipping base metal prices

 Volatility lays bare the perils of tipping base metal prices


Robin Bromby

CAREY Smith, an analyst with Alto Capital Research, made the understatement of the week by saying that global economic uncertainty rendered commodity price forecasting a challenge.

Last Monday in this space we dealt with copper going below $US7000 a tonne as something that may happen but probably not for a while anyway.

That proved a little off the mark. Once the London Metal Exchange opened on Monday, the red metal hit $US6800/tonne before clawing its way back over $US7000 by the close. It was not a good look. Copper was down again on Friday to $US6880/tonne but — according to some analysts' comments — there was a concerted effort to ramp up the price just before the close to see copper finish at $US7019. Another finger in the dyke.

Smith was talking at the annual nickel conference in Perth and was predicting extreme volatility in prices between $US17,500/tonne and $US22,500 over the next four years. He argued that new mines would leave the market flush with nickel, but the metal's price was unlikely to fall below $US15,000/tonne for any extended period and the market would lift from 2014.

It's a perilous business, this forecasting — which is why analysts are routinely issuing revised forecasts when things don't quite work out as planned. Over the weekend it was reported that the Nikkei commodity price index had, in September, taken its biggest monthly dive since the height of the GFC.

Nickel closed at $US17,600/tonne on Friday, falling by 5.7 per cent on the session. You can see the volatility of the market from the day's trading extremes, with nickel going from $US18,910 after the LME opened on Friday but at one stage touching $US17,545 — a range of $US1365 in just one trading session.

It was only in March 2007, although it seems a lifetime ago, that nickel went through $US50,000/tonne. As for the risks of sticking out your forecasting neck, it was just 18 months ago that leading British commodity forecaster Roskill saw a robust stainless steel sector in 2011 and the possibility of prices once again surging to $50,000 soon after.

Back to Friday's action, and tin was also acting up, with trades varying from $US21,600/tonne to $US19,800, or a range of $US1800 in the session. The zincing feeling continues, with that metal closing at $US1860 and lead also in the dumps.

Of course, there was a good deal of book squaring for the end of the quarter. With the Chinese on holiday this week, it's hard to say what might happen, but any substantial bounce seems unlikely because it would have to be predicated on news of Chinese metal buying, something that doesn't happen this week.

But to put it all in perspective, we reported online during the week the comments by Fat Prophets that it was sentiment rather than any big dent in demand that was driving down copper. That applies right across the base metals complex.

Brokers Intersuisse, in putting a "buy" on Morocco explorer Kasbah Resources (KAS), said they believed the tin market to be fundamental deficit but the rise in LME stocks was due to sale of inventories in China and higher production in Indonesia. "We are still believers in the tin price," they added.

Meanwhile, many have been spooked by the recent selloff in gold. But we note several comments that many traders sold the metal because their gold positions were the only ones showing a profit as September 30 loomed, and they took those profits. They had nothing else to sell that would dress up their books for the quarter.

Europe continues to unwind. Commentators over the weekend are calling the German bailout vote "too little, too late", Greek public servants are striking and delaying that country's rescue package and the IMF has rushed to give Romania a E675 million ($935m) "precautionary" loan as the wheels come off that EU member. It is only a matter of time before the money printing presses move into overdrive once again and gold will be back on an upward path.

October 03, 2011 12:00pm