Base metal prices tied to economic recovery

If the economic recovery does not gather more momentum in 1993, it appears unlikely that base metal prices will show much improvement over their depressed 1992 levels.

After sharp drops in October and November, base metal markets appear to have stabilized. But even though the prices are low, metal buyers have shown little enthusiasm.

In 1992, an extremely difficult year in the metal markets, producers continued to operate at capacity in most metals as inventories headed toward record levels.

Unless the economy continues to improve, stock-consumption ratios of base metals can be expected to deteriorate further and prices will remain under pressure.

Prices (US$ per lb.) at presstime for the major base metals: copper, $1.03; lead, 21 cents; zinc, 48 cents; nickel, $2.64; and aluminum, 56 cents. John Lydall, a mining analyst for First Marathon Securities in Toronto, feels that the base metal markets face two major problems this year — growing inventories of metals, especially on the London Metal Exchange (LME), and little growth in metal consumption on a global basis.

Lydall says that no one seems to know who owns the massive inventories of aluminum, zinc, copper and nickel on the LME. In previous recessions, the producers held a much greater proportion of the total inventory than they do now. In today’s market, producers have been dumping metal on to the LME. The owners of the majority of the LME stocks are thought to be trade speculators, merchants and investment funds. They have bought the metal in anticipation of a price rise. The longer the poor metal markets persist, the costlier it is to carry the inventory. As a result, those who borrowed to finance their purchases could be forced to liquidate their inventories. Any major selloff could cause metal prices to drop even lower.

Research company Metals and Minerals Research Services (MMRS) in the United Kingdom believes that although base metal consumption is expected to advance by up to 3% this year, the net influx of metals, particularly aluminum and nickel, from the Commonwealth of Independent States, if unabated, will continue to depress the metal markets.

To compound matters, a lengthy period of depressed prices will hold back expansion programs in the aluminum, nickel, lead and tin sectors. MMRS feels that this lack of expansion will probably lead to shortfalls in several metals in the period 1994-96. In contrast, the stronger performance of copper may have stimulated sufficient expansion to ensure that future supplies keep pace with demand. The zinc market is also unlikely to experience any major shortfalls.

On a more positive note, MMRS points out that the outlook for base metals is better in the second half of 1993 and into 1994. Assuming continued economic recovery, MMRS forecasts that aggregate prices may climb by up to 15% in 1994, followed by a gain of up to 24% in 1995-97.