NON FERROUS MARKET OUTLOOK
by Gianclaudio Torlizzi
gianclaudio.torlizzi@dowjones.com
+39.02.58.21.9919

Since early January, commodity prices have fallen because of a stronger dollar and measures taken by China to restrain excessive bank lending. But the upward trend is unbroken as we predicted. The base metals markets now show again signs of recovery after a week of selloff. Our model calls for moderate gains over the next two months. The historical dollar weakness and once again improved investor sentiment because of positive economic data should underlye the base metals for the next weeks. For the short term only the Chinese New Year adds a bearish tone to the markets. So rallies could probably be sold as investors lock in profits until the Chinese participants return to the markets after the New Years week.

We see 2010 further price gains but one a more moderate pace than last year, based on ongoing global economic recovery. We expect aluminium cash prices at the London Metal Exchange (LME) climb over 2.100 USD/t until end of February. Copper should than be again comfortably over 7.000 USD/t. Main forcees behind this upward trend are the positive view on Chinese growth in 2010 and the increasing recovery in the main western economies. China´s Chinalco has announced to change its strategic focus from aluminium toward development of its copper subsidiary China Copper Company and is looking for sources of copper concentrate overseas. Already in Dezember, Chinas consumption of copper rose over 30% to 735.000 t. This indicates that copper prices will be supported this year by elevated Chinese demand for concentrate. The improving Chinese demand for copper can be seen in the premiums in Shanghai´s SHFE over LME prices - this encourages imports to China. Cancelled warrants on copper in Asian warehouses are at their highest level since spring 2009 and copper stocks in Asia (LME and SHFE) are showing first signs of falling. LME copper stocks are near a 6-years-high and in Shanghai copper stocks rose until end of January 4% to over 101.000 t. On the negative side the hunger of the funds seems to diminish a bit. Aluminiums price strength is mainly caused by the huge amount of stocks being locked by financial deals. Rusal is said to have sold parts of its prospected output directly to the Chinese and the trading houses. This signals some tightness in immediate availability which is reflected in the contango structure of the forward curve. On the other side US aluminium imports rose by 11% (month-on-month) in November 2009. This increase signals a light improvement in demand. But the fundamentals of the market are still bearish: Excess stocks and overcapacity in Chinas aluminium industry still weight on the aluminium market. This could cause some price weakness until the end of Chinese New Year celebrations. The copper curve retains its slight contango structure at the front end, which signals a comfortable supply situation. However, the back end of the curve is now more deeply in backwardation than it was two weeks ago. This signals that the market is concerned about scarcity as we move into 2011. However, there are a handful of new copper projects set to come onstream, with the risk to impact significantly the copper market balance in the longer-term.