Funds move the marketplace

The short-term rebound in metals has yet to raise prices to profitable heights.

Most of the London Metal Exchange (LME) volumes, which have doubled over similar periods last year, are almost entirely speculative in nature, led mainly by increased fund activity. Funds are now credited with almost everything that happens in the marketplace.

The growth of various types of funds will, in hindsight, be remembered as the most significant financial phenomenon of the 1990s, probably similar to the real estate boom of the 1980s. Easily incorporated, growing in numbers and resources daily, and eagerly subscribed to by investors looking for better returns than current interest rates, funds invest their shareholders’ monies for the best return.

Akin to a feeding frenzy, funds respond to almost any sign of improvement in any industry. Optimistic forecasts by management or industry gurus often create new demand, particularly during moments when a share issue is en route. Unfortunately, fund-trading activity may also provide an opportunity for abuse. One recent report debated whether a group of legally independent funds, but apparently with related management, should have to disclose they had collectively acquired more than 10% of a speculative mining company’s shares. Perhaps coincidentally, if you believe in El Dorado, the same shares experienced a sharp rise in value as management was seeking further financing. Base metal prices continue to bubble, encouraged by optimistic forecasts for economic improvements. In the short term, however, base metal mining companies will continue to report losses and more shutdowns until inventories fall to levels necessary to reactivate capacity. At that time, sustainable price improvements will occur.

In nickel, slower shipments from the Commonwealth of Independent States, stronger consumption numbers and optimistic forecasts for diminished stock levels pushed average-to-date December LME prices to US$2.28 (US$2.10) per lb. (comparable figures for the previous month are shown in parentheses). Temporarily ignored, LME inventory growth resumed, bouncing up to 121,626 (119,196) tonnes.

Cobalt prices jumped on news that Zaire’s Shaba province intends to secede and resume using its former name, Katanga. Western brands are at US$15.50 (US$11.50) per lb. and Russian products are US$14 (US$11).

African cobalt production has decreased steadily during the past few years as taxes and corruption siphoned money needed to maintain efficient mining, smelting and refining operations. Unlike its previous attempt, this effort may succeed. Zaire’s government and currency have virtually collapsed in recent years amid rising violence and withdrawal of aid support by most donor nations.

Drops in lead concentrate, due to closures and reasonable battery demand, kept LME lead prices ahead at US20.6 cents (US18.1 cents) per lb. as LME stocks also edged up to 299,975 (298,750) tonnes.

LME zinc stocks increased again, reaching 884,350 (864,525) tonnes, as prices continue to defy gravity at US44 cents (US42.1 cents) per lb. LME inventories now exceed two months’ consumption and are growing steadily. Ignoring for the moment forecasts of looming Chilean production increases, LME copper prices have steadily inched upwards in December, reaching US76.9 cents (US73.9 cents) per lb. supported by a slight drop in the combination of LME and Commodity Exchange of New York (Comex) inventories, which sit at 657,297 (663,782) tonnes.

On little news, molybdenum oxide prices are hovering around US$2.70 (US$2.55) per lb.

Precious metals trading was generally bullish. Gold prices moved ahead to US$380.92 (US$373.94) per oz. Showing increasingly more vigor, silver surged to US$4.92 (US$4.53) per oz. Both metals will now test the upper end of the recent price range to decide the trend for the next few months. A recent platinum group metals update by Johnson Matthey generated mixed results. It forecasts a slight oversupply of platinum, the price of which moved up to US$379.88 (US$374.62) per oz., and a deficit for palladium. The price of the latter settled at US$125.06 (US$128.45) per oz. Rhodium is down slightly to US$1,000 (US$1,050) per oz.

— Jack Dupuis is a metals agent, broker and consultant specializing in the marketing of mining properties.