Base metal prices to inch up

After strong rallies up to around mid-May, Metal Bulletin Research (MBR) has been saying for a while that June was going to be a nervous period for the base metals and financial markets in general. There was the US Federal Reserve's rate-setting meeting mid-month and the UK's referendum on its EU membership follows a week later.

Since the surprisingly poor US jobs report on the first Friday of June, the Fed's once widely expected interest rate rise this month has been off the agenda. The chances of a hike in July also look slim now, especially after Fed Chair Janet Yellen's latest comments that stressed a cautious approach to adjusting monetary policy remains appropriate. Market expectations for one rate rise before September have slipped to only 24 per cent after those comments this week, having been rated as a near-100 per cent certainty as recently as late May.

This shift has undermined the dollar and seen the base metals firm up again. US interest rates being held down for longer is good news for emerging market economies too as their debt repayments will not rise as soon as they might have. There were also concerns that higher US interest rates could pour cold water on US auto sales and damage the viability of the metal inventory financing business.

But, we are wary about base metal prices strengthening on the back of a weakening US economy, especially with concerns still surrounding the Chinese economic outlook.

Financial market's now turn their attention to the UK's EU membership referendum on June 23. There are also other risk events on the horizon, including the Spanish elections, the US presidential election, rising corporate debt in China and the threat of terrorist attacks. This will keep safe-haven assets in demand, but they do little to support the base metals until these risks dissipate.

Interestingly, the Bloomberg Commodity Index has now risen 20 per cent from its January lows, signalling a bull market. Achieving this milestone may open the door to more managed money flowing into commodities, including the base metals, though fund buyers may be selective based on the respective fundamentals of each individual commodity market.

The trends in base metals are mixed. Copper prices are struggling amid expanding mine supply, a surge in LME stocks this month and concerns about demand in China.

Zinc has become the funds' favourite, with prices forging higher on the back of its supply-driven bull story. Until very recently, most of zinc's upward momentum was from short-covering, but in the past few weeks investors have been building long positions, which demonstrates greater bullish conviction.

Aluminium has a few major cross-currents in the sense that its supply-demand fundamentals are weak, but the vast stock overhang - the main bearish aspect of this market - is essentially ring-fenced as it is mostly being financed off-exchange, so is not directly part of the supply equation for now. The same might be true for nickel, even though total stocks in relative terms far exceed those of aluminium. But supply and demand have rebalanced this year and there is now a clear base on the charts. So, technically and fundamentally, nickel is moving in the right direction, albeit progress will be slow given the stock overhang.

MBR has recently revised its price forecast for zinc higher and copper and nickel lower, though for all base metals we continue to believe prices will maintain their recoveries, just each at a different pace, depending on their fundamentals.

The author is principal analyst at MBR and editor of its weekly, Base Metals Forecaster, report