NON FERROUS ANALYSIS 4 MARCH 2010.
by Gianclaudio Torlizzi

Our forecast calls for further gains in the base metals markets over the next 4 weeks. Aluminum prices at the London Metals Exchange (LME) may make up for some of their recent losses and trend up by as much as 5% by the end of March. The market was nearly flat last month, but suffered steep losses in January. Copper, on the other hand, may rise less than our base price trend line suggests, as the red metal already gained considerably in recent trading sessions on the back of supply uncertainties after the Chilean earthquake. Copper gained roughly 6% in London trading last month and started strong into the month of March due to panic buying.

Recent economic data however has softened buying sentiment. The Chinese purchasing managers’ index in February was weaker than expected. Investors fear that this could point towards a cool-off in demand of the world’s largest copper consumer. January commodity trade data confirmed that the Asian nation shifts from importing refined products to producing them domestically. Large import volumes of finished materials that were seen since March 2009 are gradually being replaced by a shift towards imports of ore and copper scrap. At the same time, the spread between the Shanghai Futures Exchange (SHFE) and LME has closed since the end of 2009. The opportunity for Chinese players to buy material cheaply in Europe has therefore closed. Similarly, recent U.S. economic data has been more or less disappointing. Purchasing managers’ indexes and consumer confidence in February were both weaker than expected. Data on the housing market was disappointing, and durable good orders performed poor. So at current high levels, copper looks somewhat overvalued in the short-term and we are cautious of temporary setbacks. The contango formation at the front end of the forward curve indicates oversupply. The World Bureau of Metals Statistics (WBMS) and International Copper Study Group (ICSG) said that the world copper surplus in 2009 was 209,300 t or 144,000 t (Jan through November 2009), respectively. LME warehouse stocks are near their 6.5 year high in spite of rising cancelled warrants. Similarly, stocks at SHFE rose in late February to 150,000 t to reach their all time high. But the copper market is in our view likely to move into deficit in 2011 on the back of tighter supply and rising demand. For example, RBS says it expects Chinese demand to grow by 10% in 2010. OECD demand will also likely post a slight recovery in 2010. We are therefore confident that market sentiment remains positive and ´we believe that in spite of current high prices, setbacks will be little pronounced. The overall upward trajectory in prices will remain in tact and influx of speculative money will persist. Financial investors have upped their long positions on copper for four consecutive weeks. Aluminum, on the other hand, has retraced substantially since the beginning of the year and is currently close to the cost curve. Though the light metal is fundamentally not as strongly supported as copper, restocking activities in Europe and the U.S. as well as supply issues on the back of accelerating power costs in Europe may support prices. Further significant retracements are therefore fairly unlikely and we believe that the light metal will prove most resilient towards any setbacks in the base metals complex. Gianclaudio Torlizzi Dow Jones Financial Information Services via Burigozzo 5 20122 Milano Tel.: +39.02.58219919 Mobile: +39.347.67.69.186