During the report period Oct. 16-20, all the base metals listed on the London Metal Exchange (LME) suffered declines in their weekly average prices. Once again, nickel and zinc prices were hardest-hit, with average cash prices shedding 6.9% and 3.3%, respectively. Of even greater concern is the steady decline in copper prices, which have now given up all of their recent gains to trade once again in the US$1,860-1,890 range, which characterized late July and most of August.
The chief influences on base metals prices are high oil prices and continued uncertainty about the direction of the U.S. economy. Although there appears to be little sign of any short-term resolution to either problem, the fund long liquidation, which has been the overwhelming factor in recent metal price weakness, appears to be slowing, particularly in aluminum, where it started a little earlier than in some other metals. Given the current high levels of global economic uncertainty, we continue to believe that aggressive short-selling of metals by funds is unlikely and that, shortly, we will see some signs of price stability returning. Farther ahead, we remain positive about both copper and aluminum prices, owing to strengthening fundamentals. On the other hand, it seems likely that nickel and zinc fundamentals will continue to deteriorate.
Copper prices closed poorly on Oct. 20, ending just above the 100-day moving average at US$1,880 per tonne, after apparently forming a base just above US$1,900 per tonne for the LME 3-month price on the previous day. Prices have now broken down below a long-term uptrend line stretching back to the lows of mid-April, and a move below US$1,880 per tonne could spark further selling.
In the short term, copper prices will probably continue to be determined by the market’s attitude to the U.S. economy. Farther ahead, copper’s fundamentals are likely to wield greater influence. LME stocks continue to fall at a rapid rate, down by almost 6,000 tonnes during the report period, and when the figures are adjusted for the 50,000 tonnes-plus of cancelled warrants, the total looks low indeed, at just 335,000 tonnes.
Negotiations are under way in the copper concentrates market, and settlement appears likely at around US$75/7.5 for next year’s term contracts. This will be a little below mid-year deals at US$80/8, and it suggests there is a growing consensus that the market is likely to get a little tighter over the next year or so. Following the big additions to concentrate supply this year from the Los Pelambres deposit in Chile (held 60% by British-held Antofagasta and 40% by a consortium of Japanese companies) and Batu Hijau in Indonesia (held 45% by Newmont Mining, 35% by Sumitomo and 20% by the Indonesian company Kuafu Indah), relatively few new additions to supply are expected. On the other hand, smelter demand looks set to rise. Tighter concentrate supply should help to restrict growth in refined output next year, which is one reason why we’re forecasting another large market deficit in 2001.
After hitting a 4-month low of US$1,485 per tonne on Oct. 18, the LME 3-month aluminum price has made a fragile recovery to trade at just above US$1,500 per tonne by Oct. 20. However, with the physical market dull and sentiment still poor, another test of the downside cannot be ruled out in the short term.
Farther ahead, we remain positive for aluminum prices, largely because of continued supply-side problems. Production data for September showed a 7.6% year-on-year increase in African production, thanks to the contribution of the Mozal smelter, but total output rose by only 1.6%.
Shortages of electrical power are still a threat to production in the Pacific Northwest region of the U.S. During the report period, the Bonneville Power Administration said it would sign new 5-year contracts with all its customers by Oct. 30. It confirmed, once again, that it will supply only 1,500 MW to the smelters in the region against total requirements, under current contracts, of 3,000 MW and 2,000 MW. We believe there will be further significant production cuts when the new contracts come into effect, beginning in October 2001. In addition, there are concerns that Alcan may have to idle 40,000-80,000 tonnes of capacity at its 275,000-tonne-per-year Kittimat smelter, owing to low hydroelectric power availability in British Columbia.
After falling to its lowest level in 12 months, at just below US$7,000 per tonne, the LME 3-month
Cash nickel remains tight, with the cash-to-3-month spread widening during the report period to US$350-400 per tonne, and there is still anxiety over the situation at Falconbridge’s operations in Sudbury, Ont., where labour relations continue to deteriorate. However, nickel consumption prospects now appear to be weakening rapidly. CRU International reports that stocks of stainless steel in Europe are proving hard to shift and that cuts to melted output in the fourth quarter are a serious possibility. In the U.S., three stainless mills are cutting back production because of high stocks, while stainless demand in Asia is soft as well.
Steel & Metal Research, an independent consultant, is calling for all European stainless steel producers to cut production by 15-20% in order to reduce stocks to more tolerable levels. Some estimates suggest European stocks of stainless steel are 20-30% higher than normal.
The International Nickel Study Group supports the view that nickel fundamentals are weakening. It recently announced that worldwide production rose in August by 3,700 tonnes over the July figure, to reach 60,600 tonnes, whereas consumption slowed by 4,200 tonnes to 82,200 tonnes.
Zinc prices deteriorated further, touching their lowest point in nearly 15 months. After a weak close on Oct. 16, following a break of support at US$1,100 per tonne, prices traded in a US$1,075-to-1,085 range before fresh selling on Oct. 20 pushed prices lower still, to test support at US$1,070 per tonne.
China Metals reports that Chinese zinc exports in September reached 46,023 tonnes, bringing zinc exported since September to 430,000 tonnes — an increase of 16% over the comparable period last year. The newsletter also reported higher levels of production in the first nine months of the year, with output rising 18.9% (year-on-year) to 1.4 million tonnes.
Chinese production in the fourth quarter is expected to be down slightly, as a result of the temporary closure of the 100,000-tonne-per-year Zhuzhou smelter. The report forecasts that a rise in output toward year-end will bring export volumes for the year to around 600,000 tonnes, representing a 14% increase over year-ago figures and taking Chinese exports to their highest levels ever.
In the short term, zinc prices are expected to reach their low point, and we do not expect further falls. If prices can consolidate at around US$1,080 per tonne and are aided by an improvement in the base metals complex as a whole, they should be able to climb back to US$1,110 per tonne. However, zinc fundamentals are clearly weakening, and we expect the upward trend in LME stocks to continue.
In a continuation of recent thin trading conditions gold prices remained in their well-worn US$270-272-per-oz. range. Prices closed in London on Oct. 20 at US$270.90 per oz.
Disappointingly, gold prices are failing to benefit much from the instability in foreign currency, energy or stock markets. The sharp falls on the Dow Jones on Oct. 18, to its lowest level since March 1999, had minimal impact on prices for the yellow metal. From the day’s low of US$269.6 per oz., prices managed a brief and weak rally to US$273.60, before closing at just above the US$270-per-oz. support level.
In financial markets, the Euro continued to slip, falling to levels below the pre-intervention range to hit fresh all-time lows. The Australian dollar found some support during the report period, and the halt in its decline brought some respite to the downward pressure on gold prices.
However, the historically strong correlation between gold and oil prices appears to have broken down irretrievably, and, despite Middle East tensions continuing to support oil prices at well above US$30 per barrel, there has been little impact in the gold market.
For the week of Oct. 23, gold prices were expected to continue testing support at US$270 per oz.
— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.
Be the first to comment on "Decline in prices continues"