Base metals seen strongest amongst commodities

Base metals seen strongest amongst commodities

0 COMMENTS  |  

ADD A COMMENT PRINT EMAIL   |

By: Reuters

5th October 2009

TEXT SIZE

SINGAPORE
- Metals markets are set for a short-term retracement before a recovery
led by copper, zinc and lead, Four Elements, a boutique hedge fund
based in Singapore, said this week.

The fund's chief investment officer, Lionel Semonin, said the outlook for metals was among the strongest of the 30 commodities the systematic fundamental asset manager looks at.

"Metals are relatively correlated," the former BNP Paribas executive
said. "We expect them to all move higher. The stronger outlook is where
you have scarcity of capacity and where substitution is less."

"Copper, lead and zinc are interesting. Copper supplies look
relatively tight. Zinc is linked to infrastructure while the issue with
lead, as we have seen, is that it is not easy to make it cleanly."

He said the economic indicators used to populate the fund's model
were constructive and appeared to offer positive signals for the medium
term.

The fund uses market-specific data on supply, demand and inventories
as well as price performance between markets, trade and other macro
economic indicators to feed its algorithms.

In the short term, his analyst team was a little conservative after the recent price rally.

"The increase in prices in the past nine months has come from
relatively few players. That lack of market breadth means we could see
quite a dramatic reversal," he said.

"We are much more prudent than we were a few weeks ago. I would not
be surprised to see a retracement in the next few weeks as
backward-looking economic indicators show a little weakness. But we
will then go higher."

CHINA

Prices of copper and lead have doubled, while zinc and nickel have
rallied 50 percent or more in the course of 2009, in part boosted by a
huge re-supply effort by China, but Semonin said consumers elsewhere
had yet to build up inventories.

"China's demand for metals will remain high. I don't think they will
want to continue stockpiling for stockpiling's sake, but they will
build stocks in relation to their growing demand.

"In the OECD, people still need to restock but the timing of that is
difficult to see. For many of these metals, infrastructure is very
important and emerging markets like Indonesia, India and South America
are the ones to watch in the long term."

The fund, established in December last year in the depths of the
economic crisis, has under $10 million under management and invests
long or short across energy metals and agricultural products.

Semonin also said other metals, including nickel and aluminium, though less positive, still had potential to rally.

"The problem with aluminium is that there is a lot of material out
there. But it is closest linked to energy because energy is a large
part of the cost of production. But you could see a squeeze on supply
at certain times that would drive prices higher."

London Metal Exchange aluminium stocks stand around a record high of
4,6-million tonnes. However, as much as 75 percent of that material is
stored under long-term financing deals and is therefore not immediately
available to the market.

He also said interest in alternative and renewable energy, besides
lifting demand for lead, would also underpin nickel in the future.

"Lead should benefit from new energy euphoria, but the same is true to a certain extent for nickel," he said.

"The issue for nickel has been softer demand and substitution in
stainless steel, which is the major user of the metal versus nickel
used in hybrid car batteries."

Edited by: Reuters