Base metals boom to last through to mid 1989

No immediate end is in sight for the higher prices, with more than a few analysts predicting the pricing boom to last at least until the middle of 1989.

According to Barrington Research Associates of Illinois, from late summer through to early December last year, prices for copper raced ahead by 60%, zinc by 30%, nickel by 30% and lead by 11%.

“Perhaps the surprise is that the prices are still holding fairly firm though the seasonal price surge historically peaks around mid-November,” wrote the research firm in a year-end publication.

For 1989, the company sees a two-sided picture for metal prices. In the nearer term, the usual seasonal slowdown is expected to follow the fall surge. “The strong heavy metal-using industrial sector will have to slow down in 1989 from its torrid pace this year. Other metal-using industries such as autos, major appliances and commercial construction are also expected to be slower in 1989. So over-all demand should be slower,” the company’s Alexander Paris projects. Supply-side factor

On the other side, the main driving force for the higher prices will continue to come from the supply side, Paris says. Learning from the last recession, the metals industry permanently closed down capacity which it has yet to replace. Less money has been spent on base-metal exploration and reserves have been falling. And inventories have been kept low by both users and producers. The company also cautions that labor negotiations involving most North American metal producers during the first half of the year could add further support to the higher prices.

In a report on base metals and the outlook for 1989, Rudolph Wolff & Co. of London ties a possible fall in commodity prices to a general slowing of the economy.

“The high rates of raw material consumption seen during the last two years are unlikely to be sustained,” writes the company. “The trend towards a higher level of semi-finished inventories supports this view and should consumption peak, or a slowdown become apparent, the utilization of such inventory would merely serve to further enhance a fall in primary demand.”

Helping to cushion any fall in metal prices, Wolff says, are the current low primary inventories, and the cyclical lag of 6-9 months between economic activity and metals consumption. “Thus, one would expect to see base metal prices continue to weaken, although a return to the former depressed levels is extremely unlikely,” the company says. Demand still strong

Expressing similar thoughts to Wolff is John Lydall of First Marathon Securities of Toronto. Demand for base metals remains strong, he writes, while inventories are low and production is slowly increasing.

“The sharply higher prices seen for copper, zinc and nickel over the last several months are the result of too little demand chasing an ever depleting inventory of metal. Memories of the `limits to growth’ worries of 1974 come back to haunt us” he says.

Two occurrences, he says, would be expected to help bring about, over the medium term, higher inventory levels and lower prices: an economic slowdown which, for a time, will reduce metal demand, and secondly, increased production (the result of the high prices) which will flow on to the market.

Lydall is optimistic metal prices will stay high during the first half of 1989, and probably beyond. For base metal companies, it will mean continued reporting of record earnings and stronger balance sheets, he says.

As for gold, which caused little excitement in 1988 except perhaps when it fell below $400 for a short spell, the general consensus appears to be bearish. According to Bill Richardson of Brown Baldwin Nisker James Capel of Toronto, the time to watch for gold pricing trends is in January.

“Gold is even more seasonal in pricing than the base metals, where the reasons are easier to explain. January is the month of strongest seasonal bullion price move in the year. A continuation of the down- trend suggests only minor upside price potential in the new year,” he says.

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