Metals markets suffered a difficult start to 2001. Copper prices shed US$80 per tonne on their first trading day (Jan. 2), eventually bottoming out at a 6-month low, and nickel suffered its largest 1-day loss (US$550 per tonne) since the settlement of the Inco strike in Sudbury, Ont., last May. Aluminum was partially supported by further talk of power-related production cuts but nonetheless shed US$60 per tonne in two trading days. Zinc, lead and tin emerged from the carnage relatively unscathed, though none of the three participated fully in the rally that boosted copper and aluminum prices in mid-December 2000. Copper and aluminum have now given back all the gains made then.
The poor start made to the new year by base metals is chiefly due to the poor economic data flowing out of the U.S.. Amid all the gloom, there was, however, some good news: Starbucks announced that its sales of coffee in December were up 8% over the comparable period in 1999. A flippant point perhaps, but illustrative of the fact that traditional industries are much less important to the U.S. economy than they used to be. The growing service and high-tech sectors are still relatively healthy and neither is adequately covered by traditional economic indices. While this may mean that the broader U.S. economy is healthier than many believe it to be, it provides little direct comfort to the metals industry, which depends primarily on such traditional sectors as manufacturing and the auto-making, which currently look weak. Perhaps the only comfort that can be drawn is that if other parts of the U.S. economy are still relatively healthy, the “soft-landing scenario” is still plausible. However, it will require all of Federal Reserve Chairman Alan Greenspan’s expertise to pull it off this time, and the next few months could be pretty grim for metals.
Copper prices fell dramatically on the first London Metal Exchange (LME) trading day of the new year, shedding almost US$80 per tonne. The decline slowed on Jan. 3, but LME 3-month copper still registered another fall, down to a 6-month low of US$1,739 per tonne. The catalyst for the fall was the release of poor U.S. data in the form of the worst report from the North American Purchasing Managers (NAPM) since 1991. The subsequent surprise rate-cut by the Fed failed to trigger the recovery in copper that it did in global equity markets, and prices ended the report period Jan. 2-5 perched precariously above the 100-day moving average on the weekly technical chart at US$1,738 per oz. Copper has not fallen below this level since April 2000, and a break below it could be the signal for funds to start going aggressively short.
Another feature of recent weeks has been a turnaround in the long-established downtrend of LME stocks. The stocks fell by more than 500,000 tonnes between March and mid-December of 2000; however, since Dec. 15, they have risen by 32,000 tonnes. The main increases have come in the U.S. at New Orleans, La. (+16,000 tonnes), and Long Beach, Calif. (+14,125 tonnes). In Europe and Asia, LME stock levels have stopped falling but have yet to show any consistent increase. If stock levels in these two regions do start to rise, it would be damaging to market sentiment.
As far as copper demand is concerned, there are worrying signs of deterioration in U.S. consumption, in addition to the rise in stocks there. The manufacturing sector is now contracting rapidly (as illustrated by the recent NAPM report), as are car sales (down 16% in December, year over year). However, the construction sector appears to be holding up reasonably well, with recent new home sales data showing a fall of only 2.2% at the end of 2000.
In Europe, the consensus appears to be for gross domestic product growth of around 2.7% in 2001, and, with stocks fairly low and a much stronger euro, it will be disappointing if buying does not pick up soon. Turning to Asia, demand looks poor in Korea and Taiwan, while there are also worrying signs from Japan, where the rate of growth in industrial production and wire and cable orders slowed in November 2000.
Aluminum prices also fell sharply on the first day of LME trading in 2001 but suffered less than copper (a fall on the day of US$30 per tonne) thanks to continued market nerves over the tight power situation and possibility of further smelter capacity cuts in the northwestern U.S. There is likely to be a good band of support for aluminum prices between US$1,450 and US$1,500 per tonne in the periods April-June and October-November.
The tightness in nearby spreads, which has pushed the cash-to-3-month quote into a US$5-7-per-tonne backwardation, should also be supportive, since it will make funds nervous about going short for the time being. An uneventful options declaration during the report period raised expectations that the long-established tightness in January would dissipate, but it appears that the positions that caused the tightness are now being rolled forward into February and March, where tightness is now developing. Despite this, demand-side fears appear to be preventing aluminum prices from climbing back above the US$1,550-per-tonne level, and a period of sideways range trading now looks likely.
On Jan. 3, nickel prices suffered their heaviest 1-day loss (US$550 per tonne) since last May, pushing prices to a low of US$6,100 per tonne — their worst since August 1999. Prices recovered a little in the second half of the week, but LME 3-month nickel will have to struggle to get back above US$6,350-6,450 per tonne. Nearby spreads have also eased. The cash-to-3-month spread contracted to a US$225-per-tonne backwardation from more than US$300 per tonne earlier in the report period. However, with some large fund shorts still in the market and LME stocks falling below 10,000 tonnes for the first time since December 1991, there is still a chance that tightness could flare again.
Zinc prices did not enjoy a particularly merry Christmas and, so far, have had a less-than-happy new year. The short-term down-trend established in early December continued, then accelerated immediately before, during and after the Christmas period. During the first day of trading this year, a US$20 fall was sufficient to push prices to an 18-month low of US$1,027 per tonne, and prices continue to look for support at US$1,030 per tonne.
The recent poor performance of not only the base metals complex but all financial markets goes some way toward explaining the reason for zinc’s uninspiring price moves. LME stock movements have also ceased to provide any support to prices; following a 450-tonne increase on Jan. 5, the net change for the report period was a small 25-tonne decrease.
Considering the much-discussed slowdown in the U.S. economy, the sharp decline in U.S. vehicle sales, the weakest NAPM index in a decade and the worst losses ever seen on the Nasdaq, it is not surprising that zinc prices suffered further losses. However, the key issue for zinc is not the recent, renewed downtrend but the chance of recovery against an increasingly uncertain economic background.
Galvanizing accounts for about half of zinc’s end-use in the Western World. With the U.S. industrial sector facing a downturn, particularly in car manufacturing, a recovery in this sector does not look encouraging. Demand from Western Europe, a larger consumer of zinc than the U.S., may prove more encouraging. With the euro more supportive towards European consumers, demand should strengthen to take advantage of the weaker U.S. dollar. And although the euro economies slowed during second half of 2000 (owing to the burden of heavy oil prices and a tighter monetary policy), we expect the first quarter of 2001 to deliver higher levels of growth.
In the shorter term, it is uncertain whether the slack in U.S. demand can be picked up by a stronger European growth performance, as it is unclear just how much slack there will be. In the longer term, it is widely agreed that zinc is headed for a surplus on the supply side. Then again, with the market’s current preoccupation with demand-side issues (one need only look at the aluminum market for proof of this), prices might still manage a recovery if there is some good economic news soon.
The last time gold prices failed to react to a falling dollar was in July 2000. In November 1998, there was also a sharp drop in the U.S. dollar, which failed to benefit gold prices. The point is that rarely are significant changes in the U.S. dollar ignored by the gold price.
When the markets reopened in 2001, gold came under immediate pressure following a weak performance during the Christmas and New Year’s period. Prices broke through the 100-day moving average, which was a key technical indicator in December and is currently just above US$270 per oz. The breakthrough to this technical level in early December was attributed to gold’s sudden rise to the mid-US$270s range. A US$4 increase later in the month also coincided with a break through the 100-day moving average, and the subsequent fall through this level partly explains the decline.
Also, increased activity in the area of producer-selling is exerting an influence on prices as prospects for the year ahead fail to generate much enthusiasm. Finally, the decline in the U.S. dollar has been largely offset by the weak performance of currencies in key Asian gold-consuming countries. The yen, the South Korean won, the Indian rupee and the Taiwanese dollar have all been poor performers of late, increasing the cost of gold in local currencies.
Despite the attempt to ration recent moves in the gold price, it remains, to an extent, a force unto its own — unpredictable and, within certain ranges, volatile. However, the outlook during the first half of 2001 looks bearish. Central bank and producer sales look set to pick up, and we forecast a test of the lows reached in 1999.
— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.
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