COMMENT: Post-LME Week price strength – green shoots or false dawn?

The dinner suits and posh frocks have hardly been put away since last week’s annual LME dinner but already there are signs that this most collective of “group hugs” in the metals industry has resulted in some much-needed price action on the upside and a jump in volumes on the exchange.

Copper, always a good barometer of the mood in the marketplace, now has a ‘5’ firmly in front of the price and is at its highest for a year. Zinc is doing even better and is changing hands at prices above $2,500 per tonne – levels last seen five years ago. Tin and nickel are not looking too shabby, either, with those lesser lights at their best since mid-2014 and mid-2015, respectively.

Does this mean that many of the movers and shakers in town last week are buying into the message of green shoots and the start of a sustained market turnaround? Or will the current burst of enthusiasm disappear as quickly as it materialised?

It helps the bull case that bulk commodity prices – materials such as coking coal and iron ore – are on the crest of a buying wave as well. And these do not, by and large, have the adrenalin boost that is provided by investment money and risk capital in exchange-traded metals. Anybody buying bulks is usually doing it because they need the commodity and intend to use it for industrial purposes.

The devil will be in the detail, of course, where each particular non-ferrous metal on the LME is concerned but the talk emanating from many of the analyst powwows last week was that the long months and years of market doldrums were nearing an end – in short, the opposite vibes to LME Week 2015 (and 2014 for good measure).

The years of lowish prices and a challenging demand-side environment have resulted in some supply-side discipline and cost-cutting exercises for many producers and refiners – although supply-demand balances and are generally not near levels where the bull-cycle blue touch-paper can definitely be lit. What can be said is that the price nadirs have probably been seen and that the “bumping along the bottom” phase looks like it is getting near its end.

Of course, nothing has really changed in the wider world over the last week and the economic prospects as a whole remain as exciting as a wet weekend. Sure – there are exceptions to this broad panoply – emerging economies, for example.

But the juries are still out on both the USA and China, the world’s biggest two users of metals – a new presidency in the former and whether it will be a hard or soft landing in the latter’s economy. Meanwhile, the UK’s Long Goodbye from the European Union is most likely to have a negative impact on Europe’s economy as a whole over the next year or two.

The elephant in the room at present is the US presidential election, which with the current two candidates is akin to two bald men fighting over a comb. The immediate impact, depending on who wins, may well see the classic knee-jerk reaction in financial markets – risk capital flying in and out of assets and gold stepping up to the plate if a safe haven is needed.

Beyond that, though, US politics watchers say the room for manoeuvre for either a President Clinton or a President Trump may well be constrained by Congress so some of the more extreme policy measures being mooted by the latter may not transpire.

Sometimes, however, the metals market can put all the potential negatives to one side – sentiment dictates direction. Often the case is that, when sentiment is overwhelmingly bearish, markets will fall on bad news but often stubbornly do nothing in response to what should be seen as positive developments – this has been the case for many months.

The opposite may be taking place now. Although sentiment cannot be described as definitely bullish, it does appear to have picked up since LME Week to the extent that there is a little bit more confidence where would-be buyers are concerned.

But whether the buying is industry-based is open to question. The tenor of conversation last week among the non-LME sector, such as the minor metals fraternity, was that there is little evidence of an end-2016 pick-up in end-user interest.

So the momentum being seen could be coming from momentum traders, systems-players, the algos, the discretionary funds and so on. And that can be flighty and erratic until there is solid certainty that there is a sea-change in the market.

If it is maintained, not only will the banks, brokers, traders and industry benefit but so, inadvertently, will the LME itself, which last week took great steps to acknowledge and accept much of the gripes that its customer and user base have had over the past two years.

Rising prices and improving markets generally go hand in hand with increased activity and, more pertinently for the LME, turnovers. The last of these is important because the exchange is keen to see the long-running headline trend of lower year-on-year volumes reversed.

And – this could be the cherry on the cake – rising prices and increased volumes can lead to more profitability for brokers, which will soften the bottom-line impact of LME contract fees and perhaps reduce the level of complaints. Who knows? November 2016 could mark a turning point both for a previously depressed market and a beleaguered LME.

That’s for the future – it remains to be seen whether this LME Week 2016 rally has legs. It may not be until January next year before that can be stated with any certainty – many times in the past metal markets have enjoyed a New Year money-based rally. And that may well be where the smart money comes from.

This article was first published on www.fastmarkets.com.

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