Prices for base metals on the London Metal Exchange (LME) showed divergent trends during the report period Sept. 18-22. Copper, nickel and lead recovered from weakness early on, to register strong closes on Sept. 22, and at presstime they appeared set to make fresh attempts at upside resistance. In contrast, aluminum and zinc prices are struggling to make headway and continue to trade at levels significantly below their mid-September highs.
Short-term prospects for both base and precious metals markets are likely to hinge on developments in the currency and energy markets. The Sept. 22 intervention on behalf of the Euro will, if successful, be bullish for metals prices. The subsequent Euro rally to the US88 level means that euro-zone copper prices are now 3% below their recent peak, whereas the price in U.S. dollars is less than 1% below. Whether or not this will tempt under-hedged European consumers to buy depends on whether or not the Euro rally can be sustained. Our view is that weak underlying fundamentals for the Euro have yet to be addressed and that, until the flow of capital from the euro-zone to the U.S. declines, medium-term prospects for the currency remain bearish.
The release of 30 million barrels of crude oil from the U.S. strategic stockpile will do little to address nervousness about refinery bottlenecks and distillate stocks. As Northern Hemisphere winter approaches, it is this factor that is driving the oil market. If oil prices remain high, metal consumers will continue to be cautious about their own medium-growth prospects and are likely to continue with hand-to-mouth buying.
Copper‘s rebound from support at US$1,950-1,960 per tonne during the report period demonstrated the resilience of the recent upturn in prices and suggests the likelihood of further gains in the short term. A close above US$2,020 per tonne would signal fresh upside momentum, though the market is wary of overhead selling.
Prices continue to be boosted by fund-buying, and while most of this is being carried out by short-term technical traders (which have been the main speculative influence in the copper market for most of the year so far), a fair amount is also being done by larger hedge funds.
There are growing concerns about China’s exporting excess copper over the remainder of the year, and what effect this will have on the market. Reuters recently quoted local Chinese traders as saying they expect copper prices in Shanghai to rise less than in London, owing to pressure from excess inventories. The differential between Shanghai and LME prices has narrowed in recent weeks. In addition, the Shanghai prompt copper premium is down to US$45-50 per tonne, compared with US$75 in mid-July. Shanghai stocks continued to climb during the report period and now stand at 97,000 tonnes. We do not dispute the fact that China’s long-term growth prospects are good, but recent developments suggest that Chinese imports will not be the supportive factor in the copper market over the remainder of 2000 (as they were in the first half).
Another reason we are a little more bearish than most analysts is the continued lack of consumer buying evident in the recent rally. Movements in spot premiums suggest that, as well as being inactive on the LME, consumers are not yet very busy in the physical market. Premiums in Asia are unimpressive, and in the U.S., they have fallen to 3-3.25 per lb. currently from 3.25-3.75 per lb. in May.
Europe is the only region where premiums have risen recently, but this may have more to do with the low level of European LME stocks (now down to just 174,000 tonnes, or 42% of total LME stocks) than the high levels of European spot demand.
Aluminum prices failed to recover from a midweek setback dropping into a new trading range of US$1,600-1,620 per tonne over the second half of last week. If aluminum is to embark on a fresh move to the upside a close above US$1,620 per tonne is required.
However, on the basis of market fundamentals the prospect for further price increases is still good. LME stocks continue to fall at a fairly steady rate of more than 8,500 tonnes per week and, although this is about 5,000 tonnes per week below the average weekly decline in August, there appears to be little sign of any let-up in the rate of withdrawal, with cancelled warrants sticking consistently at 27,000-29,000 tonnes throughout September so far.
The report period also saw the announcement of a further 56,000 tonnes per year of aluminum smelter capacity closures by Columbia Falls (one 33,000-tonne-per-year potline) and Vanalco (closing its last remaining 23,000-tonne-per-year potline), owing to high power prices. This brings the total amount of closures in the Pacific Northwest to 355,000 tonnes per year, little of which is likely to be able to restart in the foreseeable future. In addition, Turkey’s state-owned 60,000-tonne-per-year Seydisehir smelter is a possible closure target because of national power shortages.
The LME nickel 3-month price climbed convincingly back above US$8,400 per tonne on Sept. 22 and looks poised to make further gains after hurdling the 10-day moving average at US$8,460 per tonne.
It was an even stronger week for nearby quotes as the cash-to-3-months backwardation surged higher to end the period at US$330-380 per tonne — its widest level since June, when the 3-month price was more than US$9,000 per tonne. A notable development was a move into backwardation of the nearby spreads, which, until recently, have tended to trade in contango. This suggests that the market is becoming more nervous about the availability of nearby nickel supplies than it has been during previous periods of tightness.
This is hardly surprising since there have been several developments that suggest that nickel supply could be much lower than expected over the remainder of this year. Noril’sk in Russia announced that its nickel exports for the first eight months of this year are running at around 19% below last year’s levels, adding credence to speculation that Noril’sk may export around 30,000 tonnes less nickel in the second half of the year, compared with the first. Normally, Noril’sk exports are stronger in the second half than in the first half, owing to seasonal factors. However, since the reopening of the port of Dudinka in July, export shipments have been low.
In addition, workers at Falconbridge’s Nikkelverk refinery in Norway announced that they would not process matte shipments from the major’s operations in Sudbury, Ont., where a strike is ongoing. In the early weeks of the strike, Nikkelverk had been able to draw on stocks of matte so that output was unaffected. More recently, it has been operating at around 60% of capacity, and now it may cease completely — in which case, Falconbridge will have to resort to purchasing material from the market to deliver to its customers or declare full force majeure.
Where will this material come from? Although the decline in LME stocks has bottomed out now, at just above 12,000 tonnes, this is a low level, equating to little more than half a week’s demand at current consumption rates. Producer stocks are also low, having fallen to just 87,200 tonnes in July — the lowest level since December 1999. Any extra buying will almost certainly result in a rise in prices and further tightening in nearby spreads.
The fund-selling that hit zinc at the end of the previous report period (Sept. 11-15) continued at the start of the week currently under review, with support at US$1,180 per tonne proving insufficient to halt a rapid price decline. By Sept. 20, prices had plummeted to their lowest levels since mid-August. However, once US$1,140 per tonne had been reached, firm support emerged and a minor rally toward the end of the week pushed prices higher to close in London at US$1,157.5 per tonne.
A key feature of the current zinc market remains the tightness in nearby spreads. With the cash-to- 3-month backwardation hitting US$70 at one point during the report period, demand for physical material is clearly running high. Although this has prompted more zinc to be delivered to LME warehouses, the speed at which zinc stocks are rising is still relatively low and less than what might be expected as the market leaves a traditionally quiet time following the summer. Then again, with stocks rising and new production coming on-stream, bullish sentiment in the zinc market is becoming more difficult to maintain.
The strength of the US$1,200-per-tonne resistance level, compared with the weaknesses of zinc’s support levels over the past couple of weeks, indicates the frail nature of the metal’s position and highlights the importance of signs of firm demand in the future. This is where the outlook for zinc becomes more uncertain.
Despite the Sept. 22 rally in the foreign exchange markets, most currency analysts continue to forecast a weakening Euro against the U.S. dollar. The massive falls incurred by the Euro, particularly this year, have severely dented not only demand for U.S. dollar-denominated zinc within the euro-zone but also confidence in the strength of the euro-zone’s economy as it struggles to shake out structural weaknesses. Growing inflationary pressures coupled with an ailing currency do not augur well for demand prospects, despite the fact that exports are remaining firm (thanks to an undervalued currency). With U.S. demand winding down steadily and Japan’s nascent recovery still in its infancy, the importance of the Euro economy for zinc is crucial for future price prospects. However, indications and anecdotal evidence would suggest that European demand through to the fourth quarter of 2000 will be found wanting, and consequently the lack of bullish movements in zinc prices will remain a feature of the market in the short- to medium-term.
The eighth Bank of England gold auction, on Sept. 19, did little to lend support to the market and paved the way for a 12-month low for the spot price. The allotment price at US$270.60 per oz. was met with disappointment, while the cover ratio figure was surprisingly high (2.6 times). Questions were raised concerning the validity of the figure and whether or not some spurious bids lay behind the unexpectedly high level.
Two days after the auction, prices for the yellow metal hit their lowest level in almost a year. The anniversary is not without irony, as the last time gold hit such low levels, the main factor was the activity of the central banks. On Sept 24, 1999, when the gold market was in the first stages of its panicky reaction to the Washington Accord, the closing price hit US$268.40 per oz. When, on Sept. 21, 2000, gold prices hit US$268.50 per oz., moving in the opposite direction, a test of even lower levels seemed inevitable, until central bank intervention to support the ailing Euro was announced on Sept. 22. The news spurred a brief recovery for the Euro against the dollar and boosted gold prices to a peak of just below US$276 per oz. Despite the news, the Euro only briefly made it up to the levels it enjoyed during the first week of September. The gold price rally was also short-lived, with the spot price ending the day in London close to where it had started: just above US$272 per oz.
— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.
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