Zinc was strong, ending just off its intraday high at $0.5375/lb., up nearly 5 cents. Aluminum hit 97 cents before beating a sharp retreat back to $0.9479/lb., up three-quarters of a penny, while lead shot up to $0.6728/lb., up 3¼ cents.

Copper led the industrial metals on a tear yesterday, shooting up the most in two years, as traders became consumed with optimism generated by the Federal Reserve.

The metal is up 25% so far during this comeback week.

The price of copper is also likely to be supported by “supply-side vulnerability,” according to analysts at Barclays Capital. Much of its runup of the past several years has to do with mine accidents, labor unrest and lower ore grades, all of which left miners scrambling to meet demand.

But, “Given the worsening sentiment about the global economy, this rally could well be short-lived,” Barclays added. “The demand picture for metals consumption continues to remain weak.”

“We have just had a massive sell-off and prices have gone well into the cost curves for a lot of the commodities, particularly nickel and zinc,” said Jim Lennon, analyst at Macquarie Bank.

Chile, the largest copper producing country, reduced its 2008 copper output forecast for the second time since July, this time to 5.45 million metric tons, mostly due to operational issues. The Chilean Copper Commission also said falling prices may slow the pace of investments in some of the nation’s mining projects after 2009.

China’s central bank chipped in, slashing banks’ benchmark lending and deposit rates by 0.27%, the third cut in six weeks. “There was clear evidence that growth in China was slowing both in data and officials saying that … we’ll see more moves to stimulate growth over the next six months or so – everywhere but specifically in China,” said Robin Bhar, a metals analyst at Calyon in London.

Source: Industrial metals agree, All push higher on Fed move

Buenos Aires, Argentina June 5, 2008

In 2007, the strong appreciation of the Chilean peso had been the central preoccupation of the Chilean businessmen. In the last few months, active policies initiated by the Central Bank of Chile, coupled with a fall in the international price of copper and a strengthening in the worldwide value of the dollar have noticeably depreciated the value of the Chilean peso. In fact, the Chilean peso is the currency that depreciated the most against the dollar in the month of May.

This depreciation in the rate of exchange must have created a certain level of calm for Chilean businessmen. But while the exchange rate adjusted to the situation, other negative factors attacked the way in which businesses operate. For this reason, businessmen were unable to take full advantage of the improvement in the rate of exchange.

Inflation is perhaps having the worst effect on the Chilean economy at the present time, with a year-on-year rise of 8.3% for the month of April. Meanwhile, the Central Bank of Chile has as its goal an increase of only 3%, with a margin of 1% either direction. While the rate of inflation has been harming the Chilean economy, it has been partially offset by an improvement in the overall competitiveness of the economy.

The issue of inflation is causing Chilean monetary policy to move in a more restrictive direction for the next few months. This is why on May 8, during the last meeting of the Council of the Central Bank of Chile, it was discussed whether to maintain or raise the interest rate from its current level of 6.25%.

Even worse, the price of fuel has continued to rise and it is effecting the costs of production. The price of fuel is continuing to rise, and has already reached its highest level since 2001. Yesterday 120,000 trucks were lined up on a highway in a show of protest over this increase in the price of fuels. The government of Chile had injected $1 billion to create a Stabilization Fund for Fuels. However this has not persuaded the truck drivers to halt their protests.

Chilean businessmen are pessimistic, and with good cause, for they are finding themselves in a time of inflation while at the same time the Central Bank is insinuating that an increase in interest rates would adversely affect internal demand. And to make matters worse, Chile’s problems regarding power have been aggravated in the last few days by the cancellation of gas shipments from Argentina.

It is for that reason that business confidence finds itself at a historical low point in Chile. In fact, according to the Monthly Indicator of Business Confidence (IMCE), the perspective for commerce, construction, industry and mining fell to 53.4 points in May, the lowest level for that month since this registry was created. Logically, the most pessimistic area is the industrial sector for which indicator IMCE showed a value of 47.2.

Nevertheless, in spite of the general pessimism of businessmen, one can still find companies with good prospects for growth. Such is the case with the Empresa Nacional de Electricidad SA, (NYSE: EOC). During the first quarter of this year, ENDESA Chile reported earnings of $77,649 million (U$S 160 million) which represents a year-on-year variation of 44.5% (although principally due to increases that were not the result of operating costs).

Although the operating costs of ENDESA Chile have been affected by the low water levels and the high amount of fuel purchased in Chile, adequate commercial policies and the emergence of highly efficient stock portfolios have created a situation offsetting the effects of those factors somewhat. And all of this allows ENDESA Chile to be in a suitable position not only to face its next challenges, but also to transform them into opportunities for growth.

ENDESA is initiating diverse projects of investment that are mainly in Chile, Colombia and Peru. Also it has planned investment projects in Argentina.

In the middle of January of 2008, ENDESA Chile’s San Isidro II power station closed its combined cycle with a total power load of 353 MW. In 2009, once liquefied natural gas (LNG) is available in Chile, the plant will reach a total production level of 377 MW. The projected figures for the early portion of 2008 serve as an endorsement of Chile’s local electrical production ability. Another important contribution made by ENDESA to Chile’s power supply for the next few years is the installation, this past March, of the N°1 unit of the Taltal power station. This station has a capacity of producing 120 MW of power, using a diesel engine. Additionally, ENDESA is participating in the initiative of the Government to diversify the electrical grid through a project entitled GNL Quintero.

In January of this year, ENDESA signed a contract in Peru with Siemens Power Generation, to install a turbine that produces 183 MW of power in Santa Rosa plant. This project required an investment of approximately U$S 90 million. In Colombia, ENDESA is considering bidding for a public contract for energy and power programs for this year in that market by means of the development of a hydroelectric power station, capable of producing 400 MW, in Quimbo located upstream from the Betania Station. In Argentina, through its branches, Endesa Costanera S.A. and Hidroeléctrica El Chocón S.A., the company has realized an investment of U$S 160 million, that includes a U$S 42 million loan. This means ENDESA has a participation level of 21% of the thermoelectric societies of José de San Martín S.A. and Termoeléctrica Manuel Belgrano S.A. (with each of them producing combined cycles of 800 MW each).

Additionally, ENDESA Chile is a company that has a strong commitment regarding the environment through its development of projects using non-conventional renewable energies (ERNC) through its ENDESA branch Echo. It has a wind power-generating park named Canela that has been in commercial operation since December of 2007 that contributes 18.15 MW to the Central Interconnected System (SIC), Chile’s national energy grid. Also, ENDESA is committed to the acquisition of adjacent lands for the development of an immediate extension of around 60 additional MW to the park.

ENDESA Chile is a good company to bet on as an investment as a medium to long-term addition to one’s investment portfolio.

We will meet again tomorrow,

Horacio Pozzo

Editor’s Note: in Chile, businessmen seem to have been infected by the same mood as their Argentine colleagues. Although the reasons that affect the growth of both countries are almost the same, the origin of the problems and the search for solutions vary. The recommendation of the week. You can send your comments to me at: paola@latinforme.com

“What’s different?” asked colleague Manraaj Singh at this morning’s conference.

Early every morning, while most Americans are still in their beds, your editor joins a group of analysts and financial journalists to discuss the day’s news.

“What happened to the price of copper? Why are Asian stocks going down? Are they really going to cut rates today?” The answers are not always satisfying, but the questions keep coming.

And the question this morning was: what has really changed?

U.S. stocks held steady yesterday, but they’re down 5% so far this year. The dollar held steady yesterday too, but it is down for the year too – about 6% against the euro and the yen. The Europe- or Japan-based stock market investor has lost more than 10% of his money.

Meanwhile, the fall of the dollar has increased prices for imports. While the United States used to “import deflation” from Asia and elsewhere, now it imports inflation. Prices are rising all over the world.

Yesterday, European producer prices were reported rising at 6.1% per year. High prices have caused the biggest drop in retail sales on record. And yesterday, they had to call out the riot squad in Brussels, to battle fishermen who were kvetching about high fuel costs.

In China, retail prices are rising at an 8.5% rate – the fastest in 12 years.

In Russia, prices are going up at a 14.39% rate.

In Vietnam, the consumer price inflation rate is running at 25%.

In Venezuela, the inflation rate is 29%.

And in Zimbabwe…well, Zimbabwe is another story altogether, with inflation going up so fast they can’t even measure it. Prices are said to be increasing at 160,000% to 200,000% per year. But who can tell? There’s nothing to buy.

Back in Asia…the region’s central banks had hoped that Milton Friedman was wrong. They had hoped that a worldwide economic slowdown would reduce domestic inflation rates. So, they left their lending rates low – considerably lower than the CPI – in order to keep their economies turning over. In Thailand, for example, the central bank lends at 3.25%, while consumer prices rise at more than 6%.

Sound familiar? The United States also keeps its key-lending rate well below the inflation rate – and for the same reason. The Fed lends at 2%. Inflation was last clocked running twice as fast.

We pause here in honest admiration for our fellow investors – the kind of admiration we feel for members of a bomb disposal unit, or a knife-thrower’s assistant. What are we to think? They are lending money to world’s biggest debtor – the U.S. government – for 10 years at 3.94%. That’s yesterday’s yield on the 10-year T-note. If nothing changes, they will get nothing for their trouble. If inflation rates rise (or just happen to be understated), or the dollar falls, the speculation will blow up in their faces.

But along comes Ben Bernanke, with an apparent change of brain. Now, says the captain of the Fed’s rapid response recession-fighting team, further inflation is unwelcome in the United States of America. Supposedly, these words alone took $5 off the global oil price.

But what really has changed? Can the U.S. central bank really begin fighting inflation in a serious way?

The feds have discovered the same two things that their Asian central banker colleagues have found out: that the globalization street goes both ways…and that Milton Friedman was right. Inflation is a monetary phenomenon, observed Friedman. When you increase the amount of money in circulation, ceteris paribus, prices are going to go up. That they didn’t go up much in the last 15 years is merely because there were important other trends going on – notably, globalization, which was driving down prices. But now, traffic on the Avenida de Globalization is going in the other direction. And just as it was very difficult to cause inflation while globalized markets were cutting prices, so is it very difficult to stop inflation when globalized markets are increasing them.

*** Can the Fed really begin fighting inflation? Ah, dear reader…do you see the cruel twist to the story?

While the Fed couldn’t seem to create inflation in those wonderful years of the Great Moderation…now, it probably can’t do much to stop it. The U.S. imports an Everest of stuff from overseas. And stuff made overseas is becoming more expensive. The Fed can raise rates to try to cool the U.S. economy and reduce the amount of stuff Americans buy. But those darned Asians and Europeans can still buy more, and prices can still go up.

Besides, any further ‘cooling’ of the U.S. economy is risky. It could freeze up.

The crisis is said to be over on Wall Street. But the Financial Times says new IPOs are being taken off the schedule…short action on Lehman Bros. is at a record level (speculators are betting that the company is going down) and Moody’s says it might downgrade credit ratings for MBIA and Ambac.

The money just isn’t flowing as fluidly in Manhattan as it used to. An AP story tells us that apartment sales were off 21% in the first quarter. And over on Long Island, where the Wall Streeters have their weekend homes, lenders are said to cutting off home equity lines.

In the center of the country, bankruptcy filings are up 27% in Illinois. And out in Las Vegas, the mortgage fraud capital of the world, a $5 billion casino project has just been cancelled.

And this just in – California is officially suffering a drought.

Under these conditions, we’d expect Ben Bernanke to make some gestures toward protecting the dollar and reducing inflation. But we’d also expect that most of the air coming from the Fed will be hot, not cold.

“The Fed seems to be trying to create a situation whereby they are seen to be fighting inflation, simply by not lowering rates any further,” says MoneyMorning. “This is because, while the Fed may have no interest in fighting inflation, they have a big interest in fighting what they call ‘inflationary expectations’. In other words, they are more interested in fighting people’s perception of the problem, rather than the problem itself.