This market comment was written at 7:45 am on April 18th, US east coast time

Transcription

1 LME Officials as of Apr 17th close High Low Close Csh/ 3s STCKS (CH) SUP RESIS RSI Vol (000) Op/Int (000) 10 MAV 40 MAV 100 MAV 3 Month Copper , Month Aluminum , Month Lead , Month Zinc , NA Month Nickel , Month Tin , Month NASAAC , NA NA Baltic Dry Index All time high/low: 6208/843 This market comment was written at 7:45 am on April 18th, US east coast time It seems not much changed in the metal markets last week when this writer was off, during which time my colleague Mike Rapson graciously wrote this commentary. Metal prices continued to push higher for much of the week, joining a host of commodities racing north. Gold, for example, hit 25- year highs yesterday, following a strong week last week, while NYMEX crude oil is percolating just below last fall s highs, and could very well hit a new record later today. Not to be outdone, copper and zinc both hit record highs last week and are soaring once again today, as are many of the corresponding spreads, which, surprisingly, are widening despite lofty price levels. Copper has zoomed to $6475/MT this morning, up $335/MT, while zinc had a $170/MT pop higher earlier on account of Grupo Mexico declaring force majeure on deliveries of zinc late yesterday. This follows a similar F-M declaration on copper contracts made last week. In the meantime, striking Mexican copper miners and steel workers vowed on Sunday to prolong their strike after no talks were held over Easter On the US economic front, the March producer price index will be released later today, with PPI expected to rise 0.4%, a big turnaround from February's drop of 1.4%. Excluding food and energy prices, the core PPI is expected to rise 0.2%, but we would not be surprised to see an upside surprise in both these numbers given the surge in many commodities complexes over the past month. The FOMC minutes from the Fed's March 28 meeting are also set for release later today, and should provide an important glimpse into Ben Bernanke s Fed. March building permits will be out Wednesday (expected to be running at 2.1 mln units), while March consumer prices come out Wednesday, (expected to rise to be up 0.4%). The week rounds out on Thursday, with leading indicators for March and the Philadelphia Fed Index both out, (expected at unchanged and 14.3 respectively). Last Thursday, we had a decent report on US retail sales, which rose.6% in March after dropping 0.8% in February. U.S. industrial production came out on Friday, rising 0.6 percent in March, while capacity use reached its highest point in 5-1/2 years. However, more minor statistics released yesterday were gloomier; the Federal Reserve's measure of manufacturing activity for New

2 York State, for example, slumped to in April from 29.03, short of a median forecast of In a separate report from the National Association of Home Builders sentiment index dropped this month to 50 from a downwardly revised 54 in March, the lowest since November Moving to the beat of an altogether different drummer altogether, growth in China continues to surge ahead. The Chinese reported on Monday that China s economy grew by a faster-thanexpected 10.2% in the first quarter of The rise in first-quarter GDP was faster than both the 9.9% rise in the fourth quarter and growth for the full-year of 2005 and should increase pressure on the Chinese to move faster on revaluing their currency. Fixed-asset investment rose 26.6% in the first two months of this year, edging out the 25.7% rise noted for the full-year The current state of high prices in metals (particularly copper) defies logic despite the messy fundamental backdrop. The copper strike, for example, should eventually get resolved, and more importantly, has not reduced supply that significantly. Nevertheless, the copper market has focused relentlessly on this issue at the expense of any bearish news that is also making the rounds. The Chinese, for example, reported yesterday that they have imported nearly 34 percent less anode and refined copper in the first three months of this year vs. the same period last year, this despite increasing economic growth in Q1. More importantly, the latest statistics from the International Copper Study Group (ICSG) released last week suggests that world s copper supply/demand balances continue to move towards a surplus, with production now expected to exceed in consumption by 60,000 tons in January against a deficit of 25,000 tons in the same month last year (See the full report on page 7). Copper and zinc s strong price showings are also leading other metals higher --like tin and nickel -- both of which have relatively weak fundamental underpinnings. So how can we explain the relentless price surge we are seeing in metals, with copper, in particular, leading the pack? In our view, only some of the recent move higher can be explained by the fundamentals. However, the bulk of the upside must be attributable to the massive amounts of fund money chasing the complex higher. To better understand how important these fund flows are, we will be publishing a special report by early next week highlighting some of the recent work done by Fred Demler in this space. Fred has attempted to isolate and quantify the impact fund money has on metal markets, while simultaneously attempting to show why fundamentals alone cannot justify current prices levels. His findings promise to make for some interesting reading. Seen in this light, metals can push even higher, until funds get their fill at which point, the stage could be set for monstrous corrections in a number of commodity complexes.

3 COPPER SUPPORT: $6000 RESISTANCE: $7000 We are at $6475/MT this morning, up a staggering $335/MT, with little in terms of news other than the Grupo Mexico strike that is still rattling the markets. Stocks in LME warehouses continued to fall, down by 350 tons this morning to a February low of 111,300 MT. Open interest continues to expand as well, suggesting that even more length is coming in despite high prices. At this point, it is hard to say where things could top out as fund money is overriding practically anything else; look for $7000/MT as the next psychological resistance. Source for Chart: Futuresource.com ( * Zambia's copper output rose 22 percent to 119,306 tons in the first quarter of 2006 compared with the same period last year, but declined from the previous quarter, the country s central bank said in a report on Thursday. "The higher rainfall experienced during the last quarter of 2005 and the early part of this quarter prompted mining companies to spend more time pumping out water," the report said. Zambia expects to produce 600,000 tons of copper in 2006 compared with 444,051 last year. * Chile said it exported $2.755 billion worth of copper in March, up 63% from the same month last year.

4 * Copper s net noncommercial positions as reported by Comex inexplicably rose to a net short reading of 1,428 lots as of last Wednesday, up almost 1,000 lots from the previous week. The new shorts no doubt must have gotten mauled given the rapid price advance that has set in since then. Resultingly, we expect the CFTC numbers to recede back to neutral or net long by next week. ALUMINUM SUPPORT: $2570 RESISTANCE: $2690 Ali is threatening to break out of a double top formation capped by $2690 resistance (see chart below) and if it does break, as we suspect it will, prices could go much higher. Support lies along the upchannel (in green) at $2570/MT Source for Chart: Futuresource.com ( * Century Aluminum and the United Steelworkers labor union said only technical details remain to be negotiated before a new labor deal at the Hawesville, Kentucky, and facility ZINC SUPPORT: $3000 RESISTANCE: $3500 Zinc is clearly the driver today, up a $132/MT at $3135/MT at this writing. The Grupo Mexico force majeure has lifted the complex, pushing the rest of the metals up along with it. With the psychologically important $3000/MT level taken out, look for $3500/MT to be the next target.

5 Source for Chart: Futuresource.com ( * Russia's Chelyabinsk Zinc Plant said it would boost output almost 30% this year after its acquisition of Nova-zinc, a mining firm in Kazakhstan. It estimates zinc production for 2006 at 150,000 tons and said that Nova-zinc would be able to supply 20% of the raw materials needed to bring the plant to full capacity at 200,000 tons a year. LEAD SUPPORT: $1140 RESISTANCE: $1260 Lead is at $1187/MT, and relatively restrained compared to the others. However, we would not be surprised to see fund money flow into this complex as well, just as it has it has in nickel and tin, both of which look no more inspiring fundamentally. Source for Chart: Futuresource.com (

6 NICKEL SUPPORT: $17,800 RESISTANCE: $18,740 Nickel is at $17,950/MT, and seems to have broken key $17,800 resistance. However, it now needs to pull away from this line to attract more buying. We would not be looking to get in on the long side here until it does so cleanly. TIN SUPPORT: $8500 RESISTANCE: $9650 Tin could be on track to test $9650 resistance as it build upside momentum and benefits from fund flows seeking out the relative laggards. We are currently at $9050/MT, up $150/MT Source for Charts: Futuresource.com (

7 ICSG PRESS RELEASE Date Issued: 13 th April 2006 Copper: Preliminary Data for January 2006 The International Copper Study Group (ICSG) released preliminary data for January 2006 for world copper supply and demand in its April 2006 Copper Bulletin. According to the preliminary ICSG data, the refined copper market had an apparent production surplus in January 2006 of around 48,000 metric tonnes (t), increasing to around 60,000 t after making seasonal adjustments for world usage. This compares with a production deficit of 38,000 t (seasonally adjusted 25,000 t) for the same month of World refined usage recovered in January 2006 from the seasonally low level in December 2005 but remained 2.5% lower than January 2005 usage. Usage was lower in most major copper markets: Usage decreased by 10% in China, 2.4% in the European Union, 9% in Japan, 20% in Taiwan, and 5% in the United States. Usage in India, however, grew by 20%. On the supply side, owing in part to a sharp decline in Chilean mine production (-4%), world mine production in January fell by more than 12% from that in December and was at the lowest level since September The capacity utilization rate decreased to 86% from an average of 90% in Despite the drop, production remained 3.3% above January 2005 production: production in January 2005 had been reduced by low output in Indonesia. Concentrate production was up by 3.3%, and SX-EW was up by 3.2%. Total world refined production fell by almost 5% in January compared with that in December and was at the lowest production level since October Compared with production in January 2005, however, refinery output increased by 3.8%: Primary production was up by 3% and secondary production (from scrap) was up by 7%. The main contributors to this year-on-year increase were China, India, Japan and Zambia which achieved growths of 16%, 25%, 6% and 14%, respectively. The refinery capacity utilization rate in January 2006 was 80.4%. As of end of March 2006, copper stocks held at the major metal exchanges (LME, COMEX, SHFE) totalled 184,782 t, a decrease of 14,244 t from stocks at the end of February and 28,531 t from those held at the end of December Stocks were up at Comex and LME warehouses and down at SHFE warehouses. The average LME cash price for March 2006 was US$5, per tonne, as compared with the February average of US$4, per tonne. The 2006 LME average cash price through March was US$4, per tonne high and low copper prices through end of March were US$5,527.5 and US$4,537.0 per tonne, respectively. World Refined Copper Usage and Supply Trends, Thousand metric tonnes, copper Jan Oct Nov Dec Jan World Mine Production 13,211 13,637 13,581 13,680 14,508 14,910 1,203 1,243 1,280 1,311 1,413 1,243 World Mine Capacity 14,213 14,458 15,091 15,228 15,779 16,578 1,380 1,444 1,428 1,387 1,439 1,444 Mine Capacity Utilization (%) Primary Refined Production 12,632 13,713 13,419 13,443 13,783 14,320 1,184 1,223 1,218 1,240 1,278 1,223 Secondary Refined Production 2,125 1,862 1,846 1,774 2,016 2, Refined Production (Secondary+Primary) 14,757 15,575 15,265 15,217 15,798 16,425 1,354 1,405 1,398 1,420 1,475 1,405 World Refinery Capacity 17,046 17,719 18,305 18,822 19,308 20,202 1,684 1,749 1,735 1,683 1,744 1,749 Refineries Capacity Utilization (%) World Refined Usage 1/ 15,130 14,896 15,160 15,642 16,691 16,465 1,392 1,358 1,378 1,384 1,325 1,358 Four Weeks of World Refined Usage 3/ 1,164 1,146 1,166 1,203 1,284 1,267 1,267 1,236 1,244 1,280 1,321 1,236 Refined Stocks End of Period 1,291 1,992 2,048 1, Period Stock Change Refined Balance 2/ Refined Balance Seasonally adjusted 2/ Due to the nature of statistical reporting, the published data should be considered as preliminary since some figures are currently based on estimates and could change. 1/ Based on EU apparent usage. 2/ Surplus/deficit is calculated using refined production minus refined usage.