May 11, 2009 / 11:50 AM / 10 years ago

METALS INSIDER: Time to 'sell in May and go away'?

 -- Andy Home is a Reuters columnist. The opinions expressed are his own. For
more Metals Insider columns, top Reuters metals stories and third party content,
please visit the free Base Metals Community website at (www.metalsinsider.com)
-- 
 By Andy Home
 LONDON, May 11 (Reuters) - Spring is here and after the collective
near-death experience of late 2008 global markets are in euphoric mood.
 Stock markets continue to power upwards, commodities are coming back in
favour and previous safe-haven sanctuaries like the dollar and the yen are being
deserted.
 The LME complex has been basking in the spring sun, thanks to increasing
confidence the worst of the manufacturing meltdown is now over and rising hope
that demand for industrial metals could snap back just as quickly as it
collapsed.
 The following table shows the breadth of price strength since the start of
the year with only one LME component, the Mediterranean steel billet contract,
still in the red.
              Close     Chg on Week    Pct Chg  Pct Chg on Year
 Aluminium       $1,544    +$5            +0.3     +0.3
 Copper          $4,685    +$85           +1.9     +52.6
 Lead            $1,465    +$65           +4.6     +46.7
 Nickel         $13,100    +$1,200        +10.1    +12.0
 Steel FE          $355    +$10           +2.9     +6.0
 Steel Med         $332.5  -$7.5          -2.2     -12.5
 Tin            $14,000    +$1,550        +12.5    +30.8
 Zinc            $1,555    +$40           +2.6     +28.7
However, after such a surprisingly robust early year performance, is it now time
to heed that old stock market adage: "sell in May and go away"?
 CHINA GEARING DOWN?
 The "sell in May" strategy has a real-economy underpinning when it comes to
industrial metals.
 There is a distinct seasonality to metals buying patterns with restocking
buoyancy in the spring fading ahead of the dog days of summer, when northern
hemisphere fabricators take holiday downtime.
 China, note, is no exception to this rule.
 Even while the dragon's appetite continues to suck metal out of the LME
warehouse system, there is growing evidence that the Shanghai market is losing
some of its white heat ahead of what locals call "the low season".
 Most significantly, stocks of metal registered with the Shanghai Futures
Exchange are growing again. Aluminium inventory has risen for five straight
weeks, zinc for three weeks and copper for two weeks. Without anyone quite
noticing, zinc inventory at 80,074 tonnes is at a life-of-contract high.
 Shanghai copper stocks are rebuilding from an extremely depleted base and at
27,690 tonnes are still very low by any historical yardstick. But rising visible
stocks are being accompanied by a lessening of the Shanghai front-month
backwardation and by a gradual closing of the London-Shanghai arbitrage, through
which hundreds of thousands of tonnes of metal have been flowing since the start
of this year.
 The arbitrage is still open, just, but as one Chinese trading house manager
told Reuters last week, "the risk is high given the low season is coming".
 NO-ONE ELSE GEARING UP?
 China, at least, has managed to restock. There is little evidence that
consumers in the developed world have replenished thread-bare inventory levels,
which should be a positive for the metal markets.
 But do they need to restock now? Although macro indicators point to a
stabilisation and small recovery in global manufacturing activity, the metals
supply chain remains under tremendous stress.
 Detroit is still a black hole of metals demand.
 Crucible Materials, a U.S. supplier of specialist steel to the transport
sector, last week filed for bankruptcy. In the same week AK Steel issued a Q2
profits warning, Severstal announced more capacity closures in North America and
aluminium products manufacturer Kaiser shuttered its Bellwood plant in Virginia.
 Meanwhile, big one-off inflows of metal into the LME system such as the
8,775 tonnes of copper warranted at Liverpool or the 9,624 tonnes of nickel that
suddenly appeared at Singapore are a reminder that there is no shortage of
physical metal "out there". In the case of aluminium, the reminder comes daily
with each warehouse stocks report.
 For many commentators, this bleak landscape is a clear sell signal. Credit
Suisse analysts, for example, warn that "in the absence of Chinese strategic
buying, real demand remains weak while inventories are plentiful". The bank's
advice to clients is a simple: "Use the current rally as a selling opportunity".
 BUT SELLER BEWARE!
Others are not so sure. The metals team at RBC Capital Markets, for instance,
was last week advising those customers lucky enough to have ridden the early
2009 rally to take profits but warned that "outright short plays are in our view
all too dangerous".
 There are several good reasons for such caution.
 Firstly, Chinese buying may be losing its strength but it is still a key
influence in copper in particular, where the search for available LME units has
now spread from Asia (none left) to Europe (rapidly dwindling) to the United
States. Cancelled copper tonnage at New Orleans stands at 17,750 tonnes. Just
over a month ago it totalled exactly zero.
 While LME stocks are still falling, going short is a risky strategy.
 Would-be bears should take heed of events in the tin contract. LME tin
stocks have not rebuilt to any comfort zone, the front part of the curve remains
heavily backwardated and the market is little more than the plaything of
predator funds.
 Secondly, technical players do not care that much about fundamentals. They
care about technical signals and these are currently still pointing upwards. All
the LME base metals, with the exception of aluminium, have either broken or are
challenging 200-day moving averages, a key indicator for the technically-minded.
 The CTA fund herd has now covered back short positions (again with the
exception of aluminium) and is starting to build long positions.
 Thirdly, many of the bigger macro funds have completely missed the 2009 base
metals rally and are now itching to pull the trigger as economic indicators pick
up. A mass entry by such laggards could generate a next leg up in prices by
interacting with the trend-following "black box" CTA community.
 Fourthly, rising risk appetite will pressure the dollar, creating another
possible positive feedback loop for the commodities asset class as a whole.
 TENSION
 Readers will note the pros and cons for selling in May fall into two broad
categories: fundamentals, which support the proposition, and technicals, which
do not.
 This dichotomy lies at the heart of the current tension in the LME complex.
 Funds are becoming enthused about metals just at the time that Chinese
buying looks to be gearing down without any offsetting pick-up elsewhere.
 As such, there is not yet a consensus answer to the "sell in May" question.
But the tension between fundamental and technical indicators cannot exist for
any extended period of time. May will be pivotal to determining the next bigger
move in the industrial metals complex. It's just not clear yet what that move
will be.
 (Editing by Sue Thomas)
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