METALS MARKETS Base-metals outlook much improved Dickenson strike

While base metals have made significant gains from their year- end levels, the individual metals have responded to specific factors rather than being part of a bull rally across all base metals, Shearson Lehman Brothers reports in a mid- year review.

The authors of the review note how a buoyant level of demand has led to a downturn in stocks. Combined copper stocks on the terminal markets are at all-time lows, and producer stocks declined significantly during the first six months of this year. For aluminum, ipai producer inventories have fallen by 300,000 tonnes this year, with stocks on the lme down by 75,000 tonnes.

Lead stocks show a sharp decline: producer inventories declined by more than 12.5% between the end of March and end of May, and lme stocks are down 40% on year-end levels. Producer and consumer inventories of nickel are believed to be near minimum levels.

Prices for base metals have moved up accordingly. Nickel and aluminum prices have risen by 50%, while copper prices have increased by 30%. Lead and zinc prices are considerably higher than their year- end levels. Copper undersupplied

Refined copper appears to have been undersupplied in 1986 for the third successive year, Shearson says, and it is unlikely producers will fully catch up until 1988. Because of the firmness in demand and the low level of stocks, Shearson foresees no weakening of the price.

The aluminum market, Shearson reports, was tight during the first half of the year, a tightness which should ease because many producers have increased operating rates and brought on-stream idled potlines in response to higher prices. “We believe that higher output by Kaiser Aluminum, Reynolds, Alumax and Alcan together with the almost certain restart of two idled smelters in the Pacific northwest (Goldendale and Washington) will undermine the market in the final quarter,” writes Shearson. A September strike in Quebec could alter Shearson’s outlook.

Buoyed by a stronger than expected demand from the stainless steel industry, nickel prices rallied from a low of $1.55(US) per lb to around $2.25. Other factors were the low level of producer and consumer stocks, together with a shortage of stainless steel scrap and a decline in Soviet nickel shipments. Shearson foresees the tight market continuing for most of the rest of the year. “The key feature of the market at the moment is that most producers are not in a position to boost output in the short-term in resp onse to the buoyant level of demand. Sln, Outokumpu, Aneka Tambang and some Japanese nickel producers are experiencing technical problems, while Inco and Falconbridge are in the middle of summer shutdowns,” writes Shearson. Short-term squeezes

Short-term squeezes may boost the price of nickel in the third- quarter. Prices might weaken slightly during the fourth quarter as production picks up, but Shearson doesn’t see the price falling to $2. For 1988, an average price of $2.15 is predicted.

Lead and zinc prices have both benefited from labor troubles at Cominco’s Trail, B.C., refinery. Shearson foresees a possible price rally for lead as demand peaks during the battery season (September and October). “Assuming there are no more strikes, prices could weaken further late in the year and again in 1988, though the poor levels of 1986 are unlikely to recur,” according to the authors.

Following a volatile price performance in 1986, the zinc market stabilized during the early part of this year. Shearson thinks the market is fundamentally oversupplied and foresees zinc prices for the rest of this year and in 1988 staying in the $750-$800 per tonne range.