By Walter de Wet The euro at a 4-year low to the dollar ($1.2110) is putting pressure on base metals. China's PMI (manufacturing index) for May has come in at 53.9 (April: 55.7). This indicates a slowdown in manufacturing. However, China's PMI manufacturing index has consistently (for the past 6 years) printed lower in May than April — we therefore view a large part of the decline in the PMI index as “seasonal”. Also, we may see another decline in June and July, if seasonal patterns hold. In the US, COMEX copper's spec length stands at 3.1% of open interest (OI) — down from 5.6% the previous week. Copper's non-commercial interest is also well below the 15% of OI seen at the start of April. While LME copper is the benchmark for the metal, COMEX copper could be indicative of speculative activity in copper. If so, the data indicates that copper has seen large liquidation already, and most futures market liquidation may have run its course. However, with the Shanghai/LME price ratio drifting around 8.01, there was little arbitrage buying interest; the LME price therefore failed to push higher this morning. While aluminium continues to take direction from copper, the aluminium market remains relatively tight, especially in Europe. We see this not only in a rise in premiums in Europe, but also in the high sensitivity of LME 3-month copper prices to changes in LME inventories (despite LME inventories remaining high). Over the past 30 days — after accounting for movements in other variables such as the dollar, copper prices and equity prices — the aluminium price has risen by 1.6% for every 1% decline in LME inventories. The sensitivity of aluminium prices to LME inventories is another indication that large amounts of inventories are tied up in warehouse rent deals.

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