No break-out yet

A week ago, base metals markets seemed poised to move out of the recent phase of lethargic trading. However, after some volatility early in the week ended Dec. 10 (notably in aluminium and zinc), prices soon moved back into their recent ranges.

Although trading volumes continue to decline ahead of the millennium holiday break, metal demand conditions are strengthening and recent data releases are expected to emphasize the point. In the U.S., retail sales, industrial production and housing starts are all expected to show that economic activity remains robust, whilst in Germany the IFO (business sentiment) survey should indicate an improvement in euro-zone business conditions. Japan’s newly released Tankan survey of business conditions showed that although the economy is in moderate recovery, the outlook for capital expenditure is poor. Overall however, the conditions are in place for strong growth in global metals consumption early next year. However, the question remains: Has this growth been fully priced by the market?

After testing its recent highs of US$1,780 per tonne early in the week, copper weakened on fund liquidation. Volumes remain low and the trading range continues to contract as year-end approaches. Resistance has moved lower, to the region of US$1,762-65 per tonne, with support at US$1,745 per tonne.

News of a recent benchmark treatment and refining charge (TC/RC) settlement between miners and smelters suggests that the long decline in treatment and refining charges has at last bottomed out. An agreement has been reached between Freeport-McMoRan and the Japanese Smelter Pool to fix next year’s treatment and refinery charges at US$70 per tonne and 7 per lb. The deal represents an improvement for the smelters, both on last year’s settlement at US$67 per tonne and 6.7 per lb., and on mid-1999 deals in the mid-US$60s and 6 per lb.

However, the latest settlement is still a long way below the recent peak in annual charges of US$105 and 10.5 per lb. in late 1997. Nor is the situation likely to improve much for smelters over the short term. The spot market remains extremely tight, with indicative terms in the low 40s and 4s. The upturn in contract charges probably has more to do with an improvement in metal prices (up by more than 10% from year-ago levels) than any significant improvement in concentrate availability. Rising concentrate output — boosted by new production from Los Pelambres and Batu Hijau, among others — is likely to be comfortably matched by plans to raise smelting capacity at a large number of plants over the next few years, and the market could remain finely balanced for some time to come.

The London Metal Exchange (LME) 3-month aluminum price moved steadily lower during the week ended Dec. 10, toppled from its 2-year high of US$1,577 per tonne on Dec. 6 by a set of indifferent market closes. As with copper, the trading range is fairly slim and on the downside.

With technical indicators giving few clues as to future price direction, inventory movements are fairly neutral. LME stocks of aluminum continued their steady downtrend of the past few months, falling 7,025 tonnes last week. However, IPAI stocks showed an increase in producer stocks of 10,000 tonnes in October, and Japanese port stocks fell 11,000 tonnes in November. The current reported stock total of 2.7 million tonnes works out to around seven weeks’ worth of consumption at current rates. However, there remains a major discrepancy between the change in reported stocks so far this year (negative) and market balance estimates (positive). Our latest estimate of the market surplus in aluminum this year is 244,000 tonnes, but reported stocks of primary aluminium have fallen by about 120,000 tonnes so far this year. Of course, there are still a few more reporting dates for both IPAI and Japanese port stocks before year-end, but assuming the year-end figure for total reported stocks is not too far away from where we are now, and that about 90,000 tonnes of the reported stock draw this year has gone into NYMEX stocks, this implies a buildup in unreported inventory of around 270,000 tonnes in 1999.

On this basis, unreported stocks will have climbed from around 1 million tonnes at the beginning of this year to around 1.3 million tonnes by year-end, adding about 3.5 weeks of consumption to the reported figure for a total of almost 11 weeks of consumption. This is a relatively comfortable level of stocks for the aluminum industry and a key factor in our forecast of a relatively modest increase in aluminum prices to an average of US$1,600 per tonne next year.

Nickel prices proved resilient in the face of news that a labour agreement had been reached at Inco’s Manitoba division, and that full production will be resumed there within two weeks. Prices slid from their highs of US$8,280 per tonne, but the LME 3-month price held firm at US$7,940 per tonne.

Despite the lost production — 11,000 tonnes over the course of the 11-week disruption — the lockout has had little direct impact on prices. It took almost a month after the lockout began for prices to spike higher; they then failed to react much when Inco announced force majeure (for the first time ever), and now they have failed to react much on the downside.

The nickel market appears to be much more preoccupied with the positive demand outlook at present than with the return to work at Manitoba. The settlement may have longer-term implications for Inco: Workers at the Ontario division have traditionally fared slightly better than their counterparts at Manitoba, a point the Ontario workers are likely to make when their contract comes up for renewal next May.

Zinc fell back from its peak on Dec. 6 of US$1,210 per tonne as striking workers returned to work at Noyelles Godault. However, the market still looks strong from a technical standpoint, and there is solid support for the 3-month price at US$1,170 per tonne, provided both by moving averages and an upward sloping channel linking the recent lows.

In the week ended Dec. 10, LME stocks climbed by just over 2,000 tonnes to reach 275,800 tonnes, thanks to a 2,650-tonne delivery into Singapore warehouses. Zinc stocks in Singapore have now risen by around 5,000 tonnes since the end of October after falling from over 90,000 tonnes early in the year. U.S. stocks have also risen to almost double their early-year levels. However, stocks in Europe have trended steadily downward since early October, and there is now little readily available material left in prime locations. This is one of the reasons behind a recent rise in European duty paid zinc premiums, which have now climbed to US$75-85 per tonne from US$45-55 just a few weeks ago.

Central bank gold sales are back on the agenda with a vengeance after news emerged of sales by the Dutch, Russian, Malaysian and Swiss banks. Gold reacted in volatile fashion to the news that the Dutch central bank was to sell 300 tonnes of gold, the spot price falling to US$274 per oz. before recovering to US$285.60 once the realization sunk in that the Dutch sale was part of the already-announced ECB sale of 2,000 tonnes over the next five years.

The Swiss sale is also in the market already, leaving only the Malaysian (36 tonnes) and Russian (79.3 tonnes) sales as unexpected. The fact that the market appears to have been able to absorb around 140 tonnes of central bank sales in the past few weeks suggests that physical gold demand is fairly healthy at present.

— The author is a mining and metals analyst for Barclays Capital of London, England. The views and opinions presented are solely those of the author and do not necessarily represent those of the Barclays Group.