Copper exploded into life yesterday, energizing the rest of the base metals complex too. The base metals finished the day very strongly, although outside of copper, volumes remained pretty average. Aluminium has been the only metal to push higher this morning, with the rest of the complex appearing to take a breather after yesterday’s action.
With momentum having faded for the moment, focus will likely turn to this afternoon’s US economic data, including the October PPI index (expected +0.5% m-o-m), Net Long-Term TIC Flows (expected at $30.0 billion) and the October Industrial Production figures (expected +0.4%).
After receiving a kick start from China, copper had a very busy day on Monday with over 14,000 lots trading on LME Select - more than double Friday’s turnover - with 3-month prices also setting a fresh high for the year of $6,865 in the process. Although copper closed very strongly on Monday, there has been a lack of follow through buying this morning, with profit taking emerging instead.
The red metal has however managed to shrug off a stronger dollar and is trading sideways around the $6,800 mark heading into the afternoon.
Meanwhile, the drip feed of copper into Asian LME warehouses resumed today, with 1,900 mt entering the warehouse at Busan. Overall, on-warrant copper stocks climbed by 2,950 mt, the other main location for the increase being St Louis.
Aluminium has been the strongest metal this morning, reaching a high of $2,050 after stops were triggered. Prices have since drifted back slightly, with the metal coming under a bit of pressure from the stronger dollar. Elsewhere, on-warrant LME inventories climbed 23,000 mt this morning, the main factor being a 19,100 mt inflow into Detroit. Given the lack of impact on the price, it seems that the market may view this as part of a warehousing deal rather than a sign of a further deterioration in demand in that part of the world.
Zinc has tracked copper this morning, and is also now trading sideways after initial weakness overnight. Of note, reports suggest that portside stockpiles of concentrate from the Century zinc mine will run out very shortly. The transport of concentrate from the mine to the storage facility at the port of Karumba was halted on October 5th, after the pipeline developed a leak.
Monday saw a huge, net 11.5%, jump in SFE copper open interest, coupled with a big jump in the copper price. Tuesday has seen SFE prices continue to pick up along the forward curve, however open interest has declined slightly, likely representing a combination of short covering and profit taking.
Fig.1 plots the evolution of the forward curve and changes in open interest during this period. Ultimately however, this leaves two questions: what was the rationale behind Monday’s activity? And was Monday just a flash in
the pan or will we start to see sustained activity? Although order books may well be picking up, this is not yet being
reflected in the physical markets.
The suddenness of Monday’s move therefore suggests that other factors were behind the move, the most likely being Chinese concerns over the potential for further dollar weakness should the Yuan-Dollar peg remain in place,
and the impact this may have on imported inflation.
Interestingly, should the Chinese government allow the Yuan to appreciate against the dollar at some point in the future, then dollar denominated commodities would become cheaper for Chinese consumers, potentially leading to even more buying activity. Looking forward, the impact of fluctuations in the Yuan and government policy in terms of the Yuan peg, will have a real impact on commodity markets. Unfortunately, for the bears out there.
