Sharp falls in base metals offers good opportunity for investors. According to latest China Non-Ferrous Metals Trade, imports for most base metals have reduced on a yoy basis, except nickel and lead. The fall in demand could be due to rising high metal prices. With the sharp fall in metal prices recently, this will boost demand for metals in China once again.
Now is the time for investors to reaccess the fundamental of metals, and plan their investment for the year 2007. I still believe that as long as the fundamental is strong, technical analysis looks good, and funds are interested in that particular metal, price will eventually rise.
National Aluminum had recently sold alumina at USD337. This is a huge rise in percentage terms compared to previous price of USD225. If the rebound in alumina price is sustainable, this will signal the rise of aluminum price; because alumina is one of the main production cost of alumina. Another main production cost of aluminum is power. If OPEC comes in to support crude oil price, this will provide support to aluminum price as well.
One ton of wasted-copper currently priced at USD3200/ton. And copper price at LME is now $5500. This will mean that there is less incentive for wasted-copper companies to produce recycled copper. And at the same time, consumers will be more willing to buy new copper rather than recycled copper now. Demand for copper in China is still high, though not increasing, sharp fall in copper price may regain consumer buying interest.
Fundamental of tin does not change, this metal is still facing a supply shock from the main supplier: Indonesia. Only thing that has changed is that price becomes cheaper now.
Previously China had exported huge amount of zinc out to London Metal Exchange (LME). This is because the pricing of zinc in LME is higher compared to that of China. However with the sharp fall in zinc price, this will reduce the price difference, and discourage exports. With the low inventory level of zinc, price should find a bottom soon once inventory level stops rising.
Nickel is one of the metal that has maintained its strong & growing demand in China despite sharp rise in price in 2006. However due to re-structuring of commodity index, weightage for nickel has fallen by about half. Funds start to sell off their long position in nickel to match the index weightage. However fundamental of nickel is one of the best among the base metals, some hedge funds will look for opportunity to do bottom fishing. Current inventory level at LME is only sufficient to last for 2 days of global consumption.
Lead is another metal that has maintained its growing demand in China despite sharp rise in price in 2006. However I do heard that demand in India has slowed down. Investors should monitor if the sharp fall in price has caused the inventory level to continue falling.
The bubble in commodity prices continued to deflate yesterday as growing fears over demand triggered further sharp falls in key metals.
Copper fell more than 2 per cent at one point, building on a similar drop onFriday. Nickel, aluminium, lead and tin prices all retreated on the London Commodities Exchange.
"We are seeing broad-based selling across the group," said Edward Meir,metals analyst at MAN Financial. "It is still too early - and dangerous - to pick a bottom here, and we would wait for the dust to settle before entertaining thoughts of going long."
"Analysts said the sell-off was a one-off correction from the heady prices achieved last year and that it would rebound later in the year.
Copper fell as low as $5,485 a tonne, down from $5,611 at the close onFriday.
Zinc was down almost 5 per cent, lead fell 5.6 per cent, Nickel was down3.8 per cent, while tin posted a 1.4 per cent fall.
William Adams, an analyst at BaseMetals.com, said that while prices could bevolatile in the near term, they were likely to bounce back later in theyear.
"The reason metals have come off so much is that there was so much investment last year and prices were a one-way bet," he said.
He said the surge in prices to a record above $8,000 a tonne last May had created a "vacuum" that had opened the way for a one-way sell off once investors lost faith in the stratospheric prices.
But he said that the fundamentals of supply and demand still supported robust prices. "If there were any fundamental change such as a disruption from a strike, there is enough upside potential to drive a rally."
"Goldman Sachs, the investment bank, said sentiment on copper would remain negative in the coming weeks, but that prices would see renewed strength late in 2007 as global growth picked up.
"We expect the metals markets broadly to remain soft in 2007, consistent with the easing demand environment, but the longer-term supply-side constraints to remain in place, and demand to likely once again pressure supply in 2008," it said in a note to investors.
"A large supply disruption or a surge in demand, perhaps related to Chinese stock building, could quickly push the markets back into deficit.
"However, analysts at Dresdner Kleinwort said that prices were set for continued weakness as a sharp increase in supply from China signalled the end of the commodities super-cycle.
It said that Chinese domestic supply of aluminium and steel jumped bybetween 30 and 40 per cent in the middle of last year. "More capacity is expected to come on-stream during 2007 - enough said."