Base metals markets saw a promising mini-rally snuffed out in the second half of the report period April 10-14. Volatility in equity markets prevented follow-through buying, and, by the end of the week, fresh short- selling by opportunistic technical traders had pushed prices back to the bottom end of recent trading ranges. Both copper and aluminum are at 6-month lows, and nickel and zinc, which currently have the strongest fundamentals, could be in trouble if stock markets continue their slide.
The catalyst for the recent equity sell-off was the release of stronger-than-expected U.S. consumer price data: prices were up 0.7% in March, compared with market expectations of a 0.5% increase. These data underscore what we have been maintaining for some time now, namely that the risk of higher interest rates poses a threat to metals markets this year. This risk is negative for metals markets on two fronts: first, it makes speculators reluctant to buy metals because of concerns over future demand prospects; second, it means consumers will continue with the hand-to-mouth buying practices they have followed so far this year. In the short term, at least, these trends almost certainly mean lower prices across the board.
A mini-rally in
During a recent visit to a major European producer, we were reminded of just how good consumption is at present. Order volumes were up more than 30% on 1999 levels and the company’s rod mill was working weekends, whereas the schedule a year ago was five days.
However, strong consumption is not feeding through to market sentiment, which remains poor. LME stocks have now fallen 122,000 tonnes from their peak of 843,000 tonnes in mid-March, but, for the following reasons, this is having little impact on prices:
Arbitrage plays between different exchanges (notably Shanghai and the LME) mean that the physical outflow of material from LME warehouses is not an accurate barometer of copper consumption.
Cancelled LME warrants are concentrated in a small number of warehouse locations, heightening suspicion that withdrawals are being manipulated by a small group of trading companies for reasons other than physical demand.
The cash-to-3-months contango enables material to be profitably financed off-warrant, and there are said to be significant volumes of unreported stocks.
One positive outcome of the recent price fall has been a tightening in scrap availability. Scrap merchants are hoarding metal in the hope of a price recovery. On a 30-day moving average basis, the U.S. bare bright discount to primary metal has been halved, from a peak of US$120 per tonne in early March.
The week’s major news was the final withdrawal of Pechiney from the proposed 3-way merger between it, Alcan and Algroup. The stumbling block proved to be Alcan’s refusal not to divest its 50% stake in the Norf rolling mill, Europe’s largest. The European Commission had asked the firms to take steps to ensure they would not have too-dominant a position in the European market for rolled aluminum. The decision is probably market-neutral in the short term since no major changes to the group’s primary smelting capacity had been planned. The move leaves open a possible merger between Alcan and Algroup (already approved by the European Union), or perhaps Pechiney will now make its own bid for the Swiss group.
In a week of volatile trading,
As far as the two main areas of uncertainty are concerned, the issue of off-warrant stocks in Rotterdam has become something of a red herring. If there are 30,000 tonnes of Russian uncut cathode in Rotterdam, as rumour has it, this is the equivalent to little more than seven week’s worth of production from Noril’sk. As working stock, this may seem a little above the normal level for a Western producer, but it is not excessive considering the seasonal variations that occur to Russian exports as a result of having to ship out of the port of Dudinka all year round. The reason this material has not been stored in LME warehouses is probably because Russian uncut cathode currently trades on the LME at a discount of US$100 per tonne yet can be sold at a premium of US$5 per tonne to LME cash in the spot market.
Rumours that stainless steel scrap is becoming more available hold more weight. Discounts have widened in recent weeks, and there are reasons to believe that the supply of stainless steel will grow. High rates of stainless steel production and consumption usually result in higher levels of scrap generation, and stainless output has been growing strongly for more than a year now. Also, current high nickel prices could be drawing more scrap out of Russia and Eastern Europe, where supply has been quite sensitive to price.
A healthy rise in
It is disappointing that, despite strong fundamentals in terms of supply and demand,
y during most of the report period, keeping prices in a narrow range of US$280-to-US$283-per-oz. Interest in gold picked up late on April 14 in response to equity market volatility, and it will be interesting to see whether the yellow metal benefits as a safe haven if this volatility persists. Data on futures and options, released by the Commodity Exchange of New York, showed speculators going net short for the first time in many months, though, if equity markets continue to slide, this nascent trend could be rapidly reversed.
Market participants are waiting to hear what method the Swiss will use to sell their bullion stocks. It seems unlikely that the announcement, due in early May, will include plans for open market auctions in the rigid style of the Bank of England. The Swiss are more likely to adopt the more flexible, Dutch approach. This can result in lower levels of price volatility, as, when prices are higher, sellers enter the market and place a cap on increases.
The Swiss sales are already factored into market conditions and prices, so we do not expect the commencement of the sales to upset the market seriously. For the short-to-medium term, we see prices settling in a range near the US$275-per-oz. level, though equity market volatility could provide some short-term support. By the end of 2000, up to four Western national banks could be actively selling gold (in England, Holland, Switzerland and Austria). So far this year, physical demand has supported prices well, but, in the face of concerted bank selling and declining investor activity, we believe all support levels will come under increasing pressure.
— The opinions presented are solely those of the author and do not necessarily represent those of the Barclays Group.
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