Hold Your Hats! Copper & Nickel to Resume Downward Slide

In a fascinating new study of metal prices on the London Metal Exchange, data compiled by Sanford Bernstein analyst Paul Gait suggests that base metals follow an almost boringly predictable seasonal pattern.

Gait, who has become best known for his perma-bull stance on copper giant Glencore, has compiled metal price movements for every month and every quarter dating back to 1989, hunting for evidence of seasonal patterns. And there is one, quite plainly.

Base metals, including copper, nickel, zinc, lead and tin, predictably enjoy a strong start to the New Year. On average, over the 26 year period, they enjoy an uptick in prices all the way through to May, before suffering a downward lurch in June and July. A rally in August and September is then (on average) followed by a bearish end to the calender year.

Charting 2015

Some metals follow the pattern more strongly than others. Nickel and copper for example both follow the same overarching trend, but nickel is both more volatile and follows the monthly movements more predictably. Nickel has risen in January and February, for example, in a staggering 20 of the 26 years included in the study.

The figures are especially interesting, given how clearly metal prices have followed Gait’s pattern so far in 2015. Despite a rocky January, copper basically rose quite consistently before peaking in mid-May.

Prices then went on a mind-bending downward lurch, knocking mining companies like Anglo American to decade lows, before prices then flattened out, rallying so far in September. But if copper and nickel continue to follow the same seasonal pattern, we are in for another, potentially torrid, downward leg.

Glencore’s IPO

The figures also give an interesting new insight into Glencore’s listing in 2011. The group holds more than half of the world’s listed copper stocks in its warehousing unit, Pacorini Metals, and as one of the world’s dominant metal traders, its so-called “traffic teams”, which control and monitor the physical flow of commodities, are seen as having a good window on metal price movements.

“Glencore uses its knowledge of supply and demand dynamics, obtained through its physical marketing activities, to take advantage of expected movements in underlying commodity prices,” the group dryly noted, with bland understatement, in its 1,600-page prospectus in 2011.

But as Glencore’s shares tumble (down 55 per cent this year and 75 per cent since listing), the fact that the business listed in May 2011, a whisker from an all-time high in the copper price, increasingly looks like carefully considered timing, as one would expect, from the largest ever mining float on the London Stock Exchange.

Sell in May

But Glencore’s May listing also chimes with Gait’s analysis that copper and zinc, the base metals staples of Glencore’s portfolio, typically tend to peak in May, giving the group a perfect tailwind in pricing its IPO. Interestingly, the float of Goldman Sachs, which beautifully caught the top of the stock market tech boom in 1999, raising $3.6 billion, was also foisted on the market in May.

The old market adage, “Sell in May and go away”, increasingly appears to be backed up by hard evidence. Investors who have not already done so, should consider taking what they can from the September rally, pack their suitcases and take the rest of the year off, before checking in on what bargains might be available come January 2016.