LME MORNING - Base metals edge higher, track currency movements

By: Kathleen Retourne

London 31/05/2012 - Base metals moved cautiously higher in Thursday morning premarket trading after yesterday’s sharp sell-off. Market sentiment is still shaky and the complex is expected to continue to turn to the euro for direction.

The single currency earlier fell to its weakest since June 28, 2010 but has now climbed back over 1.24 against the dollar, providing some support to the complex.

May has been a dire month for commodities - if copper closes lower for the third consecutive day, it could be heading for its biggest monthly drop since September 2011.

Gold, meanwhile, is set to end May down around six percent on the start of the month. This would also be its fourth consecutive monthly loss, its worst run since the four months to August 2009. And oil has fallen 16 percent this month and faces its biggest monthly drop since December 2008.

The eurozone remains the key focus for investors this morning before attention turns to US figures later today.

Ireland will give its people the chance to vote on the European fiscal treaty, which dictates government spending and future bailout options. A rejection would mean the county will be barred from emergency EU funding when its current bailout package ends in 2013. Irish voters have twice rejected EU treaties.

In other eurozone news, Spain continues to cause concern - investors believe it is increasingly likely the country will require a bailout from the EU. The Spanish economy is twice the size of Greece, Portugal and Ireland combined.

In data, the CPI flash estimate for the eurozone at 2.4 percent came in below expectations of 2.5 percent, while Italian prelim CPI month-on-month was at 0.0 percent against a forecast 0.1 percent.   

German retail sales at 0.6 percent exceeded the expected 0.3 percent, while French consumer spending at 0.6 percent also beat a forecast of 0.3 percent.

The economic agenda is very busy today. US data includes Challenger job cuts, ADP non-farm employment change, GDP, initial jobless claims, Chicago PMI and crude oil inventories.

Copper at $7,521 per tonne was up $46 on the previous day’s close. Inventories climbed for the third consecutive day, up a net 3,575 tonnes to 230,675 tonnes, due to a 4,050-tonne increase in Gwangyang. There were also smaller gains in Busan and Singapore. Cancelled warrants at 21,575 tonnes were down 1,550 tonnes.

Aluminium at $2,013 was up $6. Stocks dropped 10,425 tonnes to 4,918,925 tonnes – the lowest since December 19. Cancelled warrants at 1,773,075 tonnes declined 10,350 tonnes.

“High production costs and negative margins for a significant number of smelters are likely to keep prices from dropping much below $2,000 for a sustained period,” ANZ said.

Yesterday nickel slumped to its lowest since December 2009. It was last at $16,466, up $166 but still below its cost of production. In the year to date, nickel has been the worst price performer across the complex.

“This is due in part to the high level of supply following the commissioning of a series of new mining projects – as the significantly increased inventories reflect,” said Commerzbank. Inventories at 107,106 tonnes were up 354 tonnes are at an 11-month high.

Further cuts to aluminium, nickel, zinc and lead output would not be surprising because these have been close to or below the cost of production.

“For the likes of nickel and should prices continue to fall in aluminium, zinc and lead, we would not be surprised to hear more talk of cutbacks - actual announcements may well prompt rebounds,” FastMarkets analyst William Adams said.

Zinc at $1,900 gained $7 even after stocks returned to April 1995 highs, up 4,050 tonnes to 940,775 tonnes - there was a 5,800-tonne increase in Port Klang, Malaysia. Total stocks there now stand at 91,275 tonnes, making it the second-largest holder of zinc after Detroit.

Lead at $1,934 was up $12, while stocks were up 50 tonnes to 349,575 tonnes, while cancelled warrants at 63,175 tonnes were down 775 tonnes.

Steel softened again to $415/438, with stocks unchanged for the 11th consecutive day at 28,145 tonnes. In the minor metals, cobalt last traded at $30,250, while stocks declined three tonnes to 352 tonnes - metal booked was for removal at Rotterdam. Molybdenum was indicated at $29,200/30,000.

(Editing by Mark Shaw)