BNP Paribas Favors Lead, Tin, Zinc Over Copper

BNP Paribas is reiterating its position favoring lead, tin and zinc over copper in the base-metals complex. The bank points out copper fell to its forecast of $6,500 as metric ton even sooner than it expected. BNP Paribas says it still looks for the copper market to move into a “material but far from catastrophic” supply surplus in 2014-15. The bank says it still has a positive view on demand, looking for growth of more than 10% over the next two years. However, the bank also looks for world mine production to rise by about 10% over 2014-15, with refined production outpacing mine output. 

The bank says a copper rally above $7,000 likely would present a selling opportunity. “But we do not believe the fundamentals warrant a decline below $6,000/t, either in the short term or in 2015, when the market will begin to look to the increasingly positive medium-term story,” says metals strategist Stephen Briggs. 

“Our preferred trading recommendation remains: short copper versus long a basket of lead, tin and zinc. The price ratios have already come a long way, but we expect copper/zinc and copper/lead both to eventually reach 2.5:1, with tin/copper at 4:1.”

Weaker Yuan Hurting Chinese Investors And Copper Prices – Analysts

Continued weakness and rising volatility in the Chinese yuan is being felt in the copper markets, a trend that some analysts are expecting to continue as investors adjust to higher risks and more open Chinese markets.

On March 3, USD/CNY opened at 6.1648, its highest open since July, 2013. Prices have since come down but still remain well above the mid-January lows around 6.040. As of 11:58 a.m. EDT USD/CNY was trading at 6.1371.

Marc Chandler, head of global currency strategy at Brown Brothers Harriman said the yuan’s current price represents a drop of about 1.5%, which is not a very volatile move compared to other currencies; however, he added the drop has been sudden enough to squeeze investors.

Chandler added that a popular investment vehicle was to borrow low-yielding U.S. dollars and purchase Chinese yuans and higher yielding bond investments, sometimes referred to as the “Chinese carry trade.” As long as the Chinese currency continued to make gains, investors made money, he said.

“What is important is that the (People’s Bank of China) has changed its tactics and is re-introducing some volatility in the (yuan),” he said. “There are a lot of structured products that were leveraged bets that the currency would stay strong. Even though 1% is a very small move - if you are leveraged 20 to 1, it kills you.”

Chandler said the reason the yuan is having an impact on copper prices is because the two are linked together. He pointed out investors used copper, iron ore or gold as collateral against these carry trade investment products.

“The unwind of the (Chinese) carry trade is not just about U.S. dollar/(yuan), it is also about (yuan)/commodities too,” he said.

Robbert van Batenburg, director of market strategy at Newedge agreed with Chandler and said “The unwinding of this copper-financed borrowing activity can both explain the excessive weakness in copper prices and the recent weakness in the yuan.”

Gold Climbs to Six-Month High as Crisis in Ukraine Spurs Demand

Gold advanced to the highest level in almost six months as worsening tension between Ukraine and Russia boosted haven demand, with prices heading for the best run of weekly gains since August 2011.

Bullion for immediate delivery rose as much as 0.6 percent to $1,374.69 an ounce, the highest level since Sept. 19, climbing for a third day. Gold traded at $1,373.39 at 1:04 p.m. in Singapore, poised for a sixth weekly gain.

The precious metal advanced 14 percent this year as demand for a store of value increased on the confrontation in Ukraine and concern growth in China is slowing. Crimea is preparing for a March 16 referendum that may pave the way for the Ukrainian region to join Russia. Barack Obama met Prime Minister Arseniy Yatsenyuk yesterday and said the U.S. stood with Ukraine to protect its sovereignty and territory.

“Gold should be supported as long as the situation in Ukraine remains uncertain,” said Zhu Siquan, an analyst at GF Futures Co., a unit of the Guangzhou-based company that bought Natixis Commodity Markets Ltd. “Technically, gold is starting to look a bit overbought.”

Gold’s 14-day relative strength index climbed to 70.5, signaling to those who study charts that prices may be set to reverse. Assets in the SPDR Gold Trust declined yesterday from the highest level this year, contracting for the first time since Feb. 19.

The confrontation in Ukraine has become the biggest between Russia and the West since the end of the Cold War, with U.S. President Obama and allies ratcheting up the threat of sanctions. Government officials and businessmen in Russia are readying for trade curbs resembling those applied to Iran, according to four people with knowledge of the preparations.

Massing Troops

Gold jumped 1.3 percent yesterday, the most in a week, after Ukraine warned that Russia is massing troops near its border. Crimea can be integrated into Russia within two months if its voters decide the territory should cease to be a part of Ukraine, said the region’s Premier Sergei Aksenov.

Diplomatic efforts to defuse the crisis continue today. U.S. Secretary of State John Kerry is due to meet with his Russian counterpart, Sergei Lavrov, in London, while Yatsenyuk is scheduled to speak to the United Nations Security Council.

Bullion rebounded this year even as the Federal Reserve, which next meets March 18-19, announced reductions to its bond-buying program at each of its past two meetings. Data today may show retail spending, which accounts for 70 percent of the U.S. economy, rose 0.2 percent in February from a month earlier.

Futures Advance

Gold for April delivery climbed as much as 0.3 percent to $1,374.90 an ounce on the Comex in New York, the highest price since Sept. 19, and was at $1,373.10.

Silver for immediate delivery rose as much as 0.8 percent to $21.469 an ounce and was at $21.3885. Platinum was at $1,474.88 an ounce from $1,475.50 yesterday, while palladium was at $775.85 from $776.08.

China's Spot Aluminium Stockpiles top 1 million tons

Spot aluminium stockpiles topped 1 million tonnes in China as downstream consumption showed no signs of recovery, according to a survey by Shanghai Metals Market.

Stockpiles of the lightweight metal on a spot basis in China’s four major trading regions – Shanghai, Wuxi, Nanhai and Hangzhou – rose by 79,000 tons last week to 1.07 million tons, according to the survey.

Spot stocks were 353,000 tonnes in Shanghai, 296,000 tons in Wuxi, 370,000 tonnes in Nanhai and 52,000 tons in Hangzhou, the survey showed.

Freeport Indonesia cuts output by about 60 pct -union official

U.S. mining giant Freeport-McMoRan Copper and Gold Inc has cut production at its Indonesian copper and gold mine by around 60 percent, a union official told Reuters on Tuesday, two months after halting exports over a dispute with the government on a new export tax.

Freeport and fellow U.S. miner Newmont Mining Corp have refused to pay an escalating export tax introduced on Jan. 12 as part of package of new mining rules aimed at forcing miners to build smelters and process raw materials in Indonesia.

"Although Freeport Indonesia has cut their production by around 60 percent, Freeport management has not yet announced any layoffs so far," Papua-based Freeport union official Virgo Solossa said by telephone.

"They are still waiting for a government decision on an export tax relaxation."

Freeport, who late last month said it may need to declare force majeure on copper concentrate sales at the world's fifth largest copper mine, could not be immediately reached for comment on Tuesday. 

USD INR at Support Level.

Long Crude Oil Speculative Bets Rise To All Time High

Whether or not institutional investors, large speculators, decided to invest alongside Putin in the one trade that is most critical to the future prosperity and positive cash flow balance of Russia, namely keeping the price of Crude high, and rising, is unknown, however, as the following chart the net position in crude oil futures as of the week of March 4, just hit an all time high of $44.0 billion up from $42.4 billion the week prior, surpassing all prior peaks, and certainly any set during the summer of 2008 when oil was threatening to make a run on $150, and was set to hit $200 if one believes Goldman (which nobody does).

Needless to say, any de-escalation in the Crimea - which has certainly been the key catalyst for the full court press to bet on rising crude prices in recent weeks - will have a substantial knock on effect of forcing open call positions to close, and in the process lower the price of crude further beyond just fundamentals, assuming those still exist.