Optimism for base metals

There are signs that the base metals complex is starting to recover following the recent volatility in nickel prices. Copper, aluminum and zinc prices all rallied in the second half of the report period June 5-9, despite further sharp falls in the price of nickel. Earlier in the week, volumes had been poor as attention focused on nickel options declaration. However, nickel call options were not exercised and nickel prices came under further selling pressure as delta hedges were unwound.

Aside from nickel, the major base metals markets seem to lack direction; indeed, with fundametals still firm, they appear undervalued at current price levels. Now that the influence of nickel market volatility is waning, the way would seem to be clear for a test of upside resistance levels. Then again, with the markets entering the quieter summer period, upside potential could be limited.

In copper, the LME 3-month price traded down to a low of US$1,715 per tonne early in the report period but recovered to close the week at US$1,747. Scale-up selling is likely above US$1,750 per tonne, but, if this can be overcome, the next target is US$1,780-1,790.

The 13-day strike continues at the Quebrada Blanca mine in Chile, though, so far, no shipments have been interrupted. Management and unions met on June 9 to try to resolve the impasse. Meanwhile, workers at Portugal’s Neves Corvo copper mine, operated by state-controlled Somincor, staged partial stoppages on June 8 to press the company to reopen negotiations on a series of demands.

London Metal Exchange (LME) stocks fell 15,600 tonnes, maintaining their average rate of withdrawal (over the past month) of 3,200 tonnes per day.

Aluminum staged a recovery, with the LME 3-month price climbing from a low of US$1,440 per tonne to close at US$1,485 on June 9, boosted by short-covering from commodity trading advisors. The rise was capped by forward producer selling on June 9.

Vanalco, a privately owned American smelter, announced it will cut production by 80%, from 115,000 tonnes per year, as a result of high power costs. Taking into account the recently announced cutback at Ormet’s Hannibal plant (7,000 tonnes per month), total U.S. cuts now amount to around 15,000 tonnes per month, compared with monthly consumption of 550,000 tonnes. Given the tight state of the alumina market, the alumina that both plants would have used will almost certainly be converted into metal somewhere else, but perhaps outside the U.S.

Although nickel prices continued to exhibit high levels of volatility, the trend remained downward. The LME 3-month price ended the report period at US$8,245 per tonne, its lowest since January, but the cash price fell even further as the cash-to-3-month backwardation contracted to around US$260 from more than US$400 earlier in the week.

Nickel’s rapid decline is attributed to an options play that had forced call-granters to cover short positions prior to the declaration of options on June 7. The bulk of the options positions ended out of the money, resulting in a sale by call-granters that put downward pressure on prices on June 8 and 9.

The falling nickel price is attributed to stale long liquidation by funds that had gone long in anticipation of a strike at Inco’s operations in Sudbury, Ont. Once this process is over, nickel prices should recover. However, with fundamentals likely to ease in the second half of this year, we expect a much lower range for the LME cash price of US$6,000-9,500 per tonne.

Against a weak base metals backdrop, zinc prices managed to trade reasonably well and ended the week slightly up, closing at US$1,118 per tonne on June 9. Despite falling from a high on June 7 of US$1,123 to a low of US$1,098 (below the psychologically important US$1,100 level), prices now seem well-supported, and we do not expect new lows to be reached in the days ahead.

Recent data reveal that China’s zinc exports in the January-to-April period reached 199,806 tonnes — up 31% on levels in 1999, which was itself the second-highest year ever for exports. China’s own zinc production climbed just 16% over the same period, so it appears some de-stocking may be taking place, raising the possibility that Chinese zinc exports could be much lower in the second half of 2000.

Precious metals gained during the report period, reflecting further doubts surrounding the direction of the U.S. economy. Gold prices on June 6 briefly broke through the US$290-per-oz. resistance level as traders moved to cover their positions, pushing prices to beyond a 2-month high at US$290.90 per oz.

A weaker greenback helped to strengthen gold prices as uncertainty over the U.S. economy pushed the dollar down almost to 2-month lows against the Euro and the Yen, and to a 1-month low against the Australian dollar. Hedge funds were seen toward the end of the previous report period and at the start of the period under review, switching positions out of U.S. dollars and into gold. This, in turn, boosted prices and led to a bout of short covering.

Once prices hit the high US$280s and broke through the US$290-per-oz. level, it was clear the rally would run out of steam as profit-taking and producer-selling kicked in, placing a cap on prices. With the U.S. dollar looking less vulnerable at presstime, we expect prices to consolidate briefly before resuming their downward direction once again.

— The opinions presented are solely those of the author and do not necessarily represent those of the Barclays group.