Precious metals in the limelight

Precious metals took centre-stage in the 5-day report period ended Feb. 4. Gold prices pushed sharply higher on Feb. 4, eventually reaching a peak of $318 per oz. in Far East trading early on Feb. 7, the highest level since mid-October. Palladium hit an all-time high of $515 per oz. and platinum, a 10-year-high of $511 per oz., whilst silver climbed 30 per oz. in the space of a few hour’s trading on Feb. 4.

The upward trend in the prices of platinum group metals has been well-established, but gold’s surge higher took the market by surprise. Inversion in the U.S. yield curve created uncertainty in U.S. financial markets, and some gold-buying was attributed to this event. Of greater importance was Placer Dome’s vote-of-confidence in gold prices: the major announced it would not be putting any fresh hedges in place. If other producers follow suit, there will be further upward pressure on prices.

Base metals markets moved lower as funds moved out of copper, aluminum and zinc, though nickel prices escaped the trend, hitting a new high for the current cycle. The weakness in base metals appears to be a temporary setback, since the outlook for demand (at least for the first half of 2000) is still good. The report-period liquidation was inspired by fears over the impact of rising short-term interest rates on economic growth, and the inversion in the U.S. yield curve will have heightened uncertainty over economic prospects.

Copper prices came under severe downward pressure despite a reversal in the recent trend of London Metal Exchange (LME) stock increases. The LME 3-month price dipped briefly below $1,800 per tonne on Feb. 4 (a level not seen since mid-December 1999), recovering to close weakly at $1,820 per tonne.

The recent increase in U.S. interest rates was the key influence on copper prices. Fears of a slowdown in the rate-sensitive housing sector caused a sell-off by commodity traders, which, prior to the announcement, had raised their net long position to a record high of 26,068 contracts. New housing starts and homes sales in the U.S. are already a long way below their peak levels of 1998, and early 1999 and will likely slow further as liquidity is tightened in the U.S. The impact of the slowdown has yet to be felt in U.S. copper demand (construction typically accounts for around 35% of refined copper demand in that country) because items such as copper wire and plumbing tube are not installed until the final stages of building completion. However, there is a risk that, in the latter part of the year, demand from this sector could begin to slow.

During the report period, aluminum fell prey to the selling by U.S. funds that also hit copper and zinc. At one stage, the LME 3-month price hit $1,680 — its lowest since mid-January. Further tightening in nearby spreads (cash to threes has moved to a $20-per-tonne backwardation) failed to support prices but continued to draw metal into LME warehouses, causing stocks to climb another 18,100 tonnes. Substantial tonnages of primary metal have been delivered to LME warehouses ready for warranting, and LME stocks will continue to climb rapidly so long as the backwardation persists.

Fears over Russian primary production have underpinned the market in recent weeks, but they appear now to be easing. The 270,000-tonne-per-year Novokuznetsk smelter is trying to overturn a decision made by a local court to block its exports. With its accounts frozen and assets seized, there are fears the smelter will not be able to obtain raw materials. However, the plant’s managers report it has enough alumina in its own inventory (plus from other unspecified resources) to keep production on-track for at least another month. Meanwhile, the 840,000-tonne-per-year Krasnoyarsk smelter denied rumours that it is short of alumina, claiming it is receiving supplies from external sources and that it will be producing at levels similar to those of last year.

Fears of an aluminum shortage at Krasnoyarsk began a few months ago, when one of its suppliers, the Nikolaev refinery, stopped shipping alumina to the smelter — the result of an ownership dispute. We understand that some of this alumina has been re-routed to the Tursunzade smelter in Tajikistan, where production this year is to be raised by 70,000 tonnes, to 300,000 tonnes. There is also speculation that Kaiser is considering restarting its Gramercy alumina plant in the third quarter. Since the insurance claim relating to damage at the plant has yet to be settled, this looks unlikely.

Alumina spot prices have now reached $400 per tonne, yet we remain skeptical that alumina tightness will significantly constrain primary production this year. China Aluminum Corp. (Chalco), which controls around 60% of Chinese smelting capacity, is said to have signed long-term contracts covering 80% of its requirements this year, though this still leaves many smaller Chinese smelters uncovered. Traders in the region report that China’s exports of aluminum have risen recently as a result of high LME prices; nonetheless, imports are expected to climb sharply after the Chinese New Year.

Nickel prices climbed steadily higher during the report period, hitting a new peak of $9,125 per tonne for the LME 3-month price on Feb. 4. Funds were encouraged to increase their long positions thanks to a poor production report from the Murrin Murrin laterite mine in Australia and positive statements on the market from two major players. LME stocks fell 612 tonnes, as the 3-month spread that has been tightening for several weeks moved into backwardation. The market continues to focus on rampant growth in stainless steel demand (up 14% in the fourth quarter of 1999, according to CRU International) and shrugged off news of a possible production restart at Australian-based WMC (Western Mining Corp.) and extra production from Eramet.

Outokumpu and Toronto-based Falconbridge have both been fanning the flames of the nickel market. The Finnish producer of stainless steel says it expects world consumption of cold rolled stainless steel to grow by 6-10% in 2000 (it grew 9.5% in 1999). Falconbridge, in the course of announcing its fourth-quarter results, said it expects stainless steel production growth of 6% and that this would result in nickel consumption growth of 5% and a nickel market deficit of 20,000 tonnes.

With further bad news from Murrin Murrin (it produced just 600 tonnes in December 1999), the market attached little importance to the announcement from WMC that it is now producing at a 100,000-tonne-per-year rate, compared with an annualized rate of 78,000 tonnes through much of 1999. WMC will soon make a decision on the reopening of five mines at Kambalda, and this could add a further 10,000 tonnes per year to production. Eramet also plans to raise its production to 59,000 tonnes from an estimated 56,000-57,000 tonnes in 1999.

These production rises are small in relation to the potential increase in demand this year, but they could increase the possibility of a surplus in the second half of the year, by which time nickel consumption will be slowing and Russian exports will be at their seasonal peak.

Meanwhile, zinc prices continued their headlong descent. LME stock deliveries slowed after the previous report period’s 9,000-tonne increase. Stocks fell by 1,200 tonnes, but this was not enough to prevent the LME 3-month price from slipping to $1,104 per tonne — its lowest level since early August 1999.

The market’s focus was on concentrates, though no processing deals between miners and smelters were reached at the conference of the American Zinc Association, held recently in Arizona. Traditionally, the AZA meeting has been a forum for reaching such agreements; this year’s discussions, however, were clouded by uncertainty over the fate of Outokumpu’s 140,000-tonne-per-year Tara mine, in Ireland, where a dispute is currently in mediation.

Nevertheless, concentrates remain in ample supply in most regions and are unlikely to prove a constraint on metal production this year.

Gold prices leapt higher on Feb. 4 after climbing steadily for most of the week. Spot gold ended the day in London at a shade under $300 per oz. — its highest level since late October 1999. The prospect of producer buy-backs has been keeping the market edgy for some time now. Early on Feb. 4, a major U.S. trading house bought in volume, and the price easily hurdled resistance just above $290 per oz.

Later on Feb. 4, an announcement from Placer Dome that it would suspend fresh hedging (as a mark of its confidence that gold prices are headed higher) added fuel to the rally. Placer’s action could remove as much as 2 million oz. of potential sales from the market this year.

The move adds to recent strength in the precious metals sector, with palladium fixed at an all-time high of $515 per oz. on Feb. 4 and platinum at $511, its highest level since March 1990. However, with physical buying a little weak at present, there would appear to be little justification for the higher gold price. Instead, it appears to be fund short-covering that is fuelling the rally.