Japan Earthquake: Base Metals may boom

The massive earthquake that hit Japan early Friday added to some short-term pressure on base metals, but will be a supportive influence down the road.

For now, analysts said, it could be one more drain on economic growth, along with rising oil prices due to Middle East-North Africa unrest and European sovereign-debt worries. But farther into the future, the quake will mean reconstruction that requires commodities such as copper and aluminum.

Analysts said they see a more limited impact from the quake on gold. Initially, some say, there could be selling not because the quake is somehow inherently bearish for the metal, but simply because some investors may need to raise cash to cover margin calls in other markets. Down the road, they say, the quake is likely to have little impact as the focus instead returns to other factors such as currencies, geopolitical tensions and Europe’s ongoing debt saga.

Japan was hit by its most powerful earthquake in at least 100 years. An 8.9 magnitude quake triggered a tsunami, killing hundreds and causing widespread damage.

The reaction by the metals markets so far have been somewhat muted, several observers said.

Still, the quake added to a list of factors creating uncertainty about the economy and thus demand for base metals, said Robin Bhar, senior metals analyst with Credit Agricole CIB. The list includes euro-zone debt issues, as well as civil unrest in Libya and worries this could spread elsewhere in the region, pushing oil prices up and in turn hurting economic growth.

“This only serves to add to that,” Bhar said, citing further risk reduction. “The fact that it happened before the weekend accelerated the book-squaring, as people watch and wonder what is going to happen.”

Base metals on the London Metal Exchange were weaker as the New York trading morning began. As of 10:54 a.m. EST, May copper was 3.45 cents lower at $4.1630 per pound, recovering after it earlier hit a $4.0860 low that was its weakest level since mid-December.

In coming quarters, however, the quake is likely to mean more demand for copper. When big earthquake hit the Japanese city of Kobe in 2007, Bhar said, a pick-up in demand began about six months later.

“There will have to be rebuilding going on. That would suggest stronger demand for copper when that rebuilding commences,” said John Gross, an independent metals-industry consultant.

This would be especially supportive for copper and aluminum, said Mike Zarembski, senior commodities analyst with optionXpress.

Bahr emphasized, however, the disaster will not affect the copper market as much as if a similar disaster were to ever hit China. “China accounts for 40% of global copper demand,” he said. “Japan, by comparison, would be around 5%.”

Meanwhile, as of 10:51 EST, Comex April gold was up $2.50 to $1,415 an ounce, recovering from an earlier low of $1,404.80. May silver was down 11.1 cents to $34.955 but well up from a $34.05 low.

“I don’t think it impacts the gold market to any degree,” said Bill O’Neill, one of the principals with LOGIC Advisors. “It’s not a military or political issue or anything like that.”

Weakness in other markets, however, could mean some margin-related selling in gold, Bhar said.

“It’s often sold because it’s maybe the one asset where there are still profits to be liquidated,” he said. “So investors sell the gold to cover margin calls and losses in equities and commodity markets.”

If that is the case, such a post-earthquake reaction by gold should be a temporary phenomenon, he said.

“Everything else being equal, it shouldn’t really have too much, if any, impact on rises,” Bhar said. “It’s a situation that is probably going to be outweighed by bigger worries about geopolitical tensions, bigger worries about oil and bigger worries about debt.” (Kitco News)