The report period Feb. 7-11 was a mixed one for metals markets as nickel rallied to a 6-year high, gold hit a 4-month high and copper staged a technical rally. Also, zinc prices appear to be bottoming out after recent weaknesses. On the other hand, aluminum’s gains were unimpressive, especially when compared with the strength in nickel and copper.
With the notable exception of nickel, enthusiasm for base metals appears to be waning. One reason for this is that demand for copper and aluminum do not appear to be picking up in any of the main consuming regions; another is concern over inflation. The rally in oil prices to a 9-year high is heightening inflation fears, and data from Japan showing that consumer spending fell for a seventh straight year in 1999 are probably inducing further caution. The weak household spending data, coupled with other indications, suggest that the Japanese economy could be heading back into a recession.
Rising prices in related markets — notably nickel and oil — probably helped to turn the fund view of copper positive once again (Brent Crude hit a 9-year high; nickel, a 6-year high). But despite the LME stock fall, there is still little to get excited about in copper market fundamentals. Demand in the Far East is slack, owing to the Chinese New Year holidays, while, in the U.S., there is little sign of any upturn in demand and premiums are little-changed since the beginning of the year. In Europe, large shipments of copper continue to arrive in Rotterdam and Hamburg, helping to depress premiums and suggesting that the report-period fall in LME stocks will soon be reversed.
The technical squeeze on fund shorts continues, with most of the tightness concentrated in February. Until this dissipates, LME stocks are expected to continue rising. They climbed another 38,000 tonnes in the report period, and a further increase of this magnitude is expected soon.
High prices and the backwardation have had a negative impact on consumer buying. Consequently, despite a strong start to the year in fabricated product markets in Europe and the U.S., spot premiums for physical metal in many locations have eased. High stock levels and good availability are also putting downward pressure on premiums. As well as the increase in LME stocks, data released during the report period showed that IPAI stocks of unwrought aluminum climbed 30,000 tonnes in December 1999 to 1.8 million tonnes. Japanese port stocks also remain high.
We still expect the market to move into significant deficit in the second quarter of this year, and, as we approach that period, reported stocks should begin falling rapidly. Much of the metal recently delivered to LME warehouses is already believed to have been sold forward and will not be available to the market. As a result, both premiums and prices are likely to come under upward pressure as the second quarter approaches (if demand improves as expected).
It was another good week for
Nickel’s recent gains are attributed to the announcement of force majeure on all ferronickel deliveries by Eramet, owing to a labour dispute that was disrupting supplies of ore to its Doniambo smelter in New Caledonia. The labour dispute has led to a blockade of the plant that has cut ore deliveries. Using stocks of ore, and the few deliveries that are getting through, the smelter is operating at about 70% of its normal capacity. In 1999, Doniambo produced an estimated 49,000 tonnes of ferronickel and shipped 11,000 tonnes of nickel matte to Eramet’s Sandouville refinery in France. Eramet has also declared force majeure on deliveries of nickel metal and salts from Sandouville. According to Eramet, the Doniambo smelter cannot operate safely at levels below 70% of capacity. It has warned that the plant may have to be closed if ore runs out.
According to a Reuters report, Eramet has already informed customers in Japan and Korea that it is to cut contracted deliveries of ferronickel by about 33% in February. If the strike turns out to be serious, Eramet’s customers will be forced to buy more nickel in order to maintain their own output of stainless steel, putting further pressure on scarce nickel stocks and almost certainly contributing to higher LME prices.
Recent heavy falls in
News on Feb. 9 that the Western World saw a fifth year of deficit in 1999 helped to strengthen zinc’s claw-back from its Feb. 8 low of $1,107 per tonne, which had threatened to test $1,100. The supply-and-demand data released by the International Lead and Zinc Group showed that global demand for refined zinc has, for the first time, broken through the 8-million-tonne barrier. Western consumption was up 4.1% to 6.8 million tonnes, aided mainly by a U.S. increase of 9.2%. LME warehouse inventories by year-end were 279,000 tonnes — a reduction of 38,000 tonnes over levels at the end of 1998. Also, reported producers’ stocks totalled 298,000 tonnes by year-end, down 12,000 tonnes from a year ago.
From a fundamental perspective, zinc appears significantly undervalued at current levels since stocks are close to critical levels and still falling (LME zinc stocks have resumed their downtrend, shedding almost 4,000 tonnes in the past two weeks). In recent weeks, zinc has suffered from a withdrawal of fund money and the closing out of a position by a major zinc trader. However, with the bulk of long liquidation now out of the way, we believe the prospects for a significant rise in prices over the next few months are good. In the short term, the steady progress away from recent lows needs to be maintained, and, if the LME 3-month price closes above $1,132 per tonne, it could open the way for a test of resistance at $1,160-$1,170 per tonne.
Barrick Gold, which recently released news of record profits (largely on the back of its massive hedge position), followed suit by announcing it will see a less severe reduction in its hedge position. In the fevered market that emerged at the start of the week, it seems expectations were not met, and the Barrick reduction, amounting to a committed cut to 9.8 million oz. at the end of 1999 (from 18.8 million at the end of the third quarter), failed to impress dealers as the price moved downwards in the following days.
Greater upside potential in the near-term will depend on how much hedge positions, on the whole, are trimmed and how committed producers are to this new-found anti-hedging zeal. The euphoria for trimming hedges, seen in the wake of the Placer announcement, may be short-lived and transparent. If prices were to return to US$340-US$360 levels, pushed up by producer announcements, perhaps, the temptation to hedge would prove too difficult for many to resist. Attempts by some producers to talk up the price of gold have provided a short-term rally, yet the long-term fundamental situation remains little-changed. Like all of the spikes seen over the past year in the gold market, it was driven by headlines and surprise “announcements,” whether from producers, central banks, international financial organizations or national governments. The long-term aftermath of each spike has been constantly the same — a steady decline in prices back to “pre-headline” levels.
A further continuing threat to gold is posed by the central banks, which are continuing to look for increasingly attractive ways to reduce reserves and invest funds in more profitable financial instruments. Either way, if higher prices do not bring in producer selling, they will bring in central bank selling.
It is hardly surprising that the activity in the gold market, coupled with soaring platinum group metals, have diverted attention away from
Be the first to comment on "Mixed bag for metals markets"