Bearish year saps life out of metals markets

For the 1998 Teddy Bears’ picnic, the main course was probably the metals, which were swallowed whole by bearish market sentiment.

The skittish precious metals market was kept on edge for much of the year by speculation over how much gold would be kept in the vaults of the European central banks. Sales by the banks had put nearly continuous pressure on the markets in 1997, though, curiously, the announcement of completed sales, and not the sales themselves, had caused prices to drop.

When the European Union’s new central bank declared it would back the new Euro with gold, roughly in proportion to the existing holdings of the national central banks, the gold market was relieved but has yet to recover strongly.

Gold opened the year at US$289.20 per oz., so despite the still-long faces of the gold producers, it can be said the yellow metal at least has not done any worse. Platinum, at US$350 per oz., is also only a little behind after a rocky year.

The “B Division” of the precious metals provided more excitement, as storied U.S. investor Warren Buffett bid silver up to US$7.26 per oz. But the white metal is back below US$5, about the same price Buffett found it.

Supply worries put palladium on a rocket in mid-year, when it touched US$417 per oz., passing both gold and platinum on the way. Order has returned to the marketplace, and the price is likely to settle in the US$300 range — still an impressive gain compared to the rest of the pack.

The base metals, of course, are more sensitive to the state of the world’s economy, and the state of this one couldn’t be much worse for base metals as the industrial economies of the Pacific Rim continue to recede.

Copper, where the base metal market’s latest string of woes started, looked to have seen the worst at the end of 1997. It had reached a 1996 high of US$3,232.50 per tonne before Sumitomo Metals copper czar Yasuo Hamanaka demolished the market in a failed attempt to squeeze the copper supply. By the end of 1997, the red metal had been battered down to US$1,724, with the Asian crisis and medium-term supply picture both convincing the market that the world was already at an end.

But despite some brief rallies in the spring, the price fell further still, and last month broke US$1,500 — another “barrier” that was no barrier at all. London Metal Exchange (LME) warehouse stocks, which had ended the year at 335,000 tonnes, ballooned to more than 570,000 tonnes over the course of the year, and as the perception deepened that the Asian economies were not going to turn back into the metal-happy buyers of 1995, market sentiment only got worse.

The LME’s other notorious sad sack, nickel, started 1998 at US$5,990 per tonne (US$2.71 per lb.) and has seen little but bad news since. Even with lower above-ground stocks and the Voisey’s Bay project stalled in a vintage-quality Labradorian autumn fog, nickel supply looks to stay bigger than demand for at least two years. At the same time, there is a threat of lower-cost production from a new generation of laterite leaching projects, currently being developed in Australia at Murrin Murrin, Cawse and Bulong.

Zinc tried hard in a losing cause as above-ground stocks fell by a third, but it still is finishing 1998 slightly lower than it came in. From US$1,090 in January, it has seen a few rallies as supplies got low, but went below US$1,000 to stay in September. Like zinc, lead is a bit scarcer too, but that hasn’t prevented a slide from US$559 per tonne to the US$490 range today. Aluminum is down about 20% from its 1997 close of US$1,535.50 per tonne, also despite lower warehouse levels.

Tin, which will finish the year around US$5,200, hasn’t lost much ground, but a backwardation that dates to the early part of the year has at last inverted.

Among the producer-traded ferro-alloys, cobalt has shown the most dramatic slide, from averages of around US$22 per lb. in 1997 to US$13 and less this month. Chromium prices, hard to peg in a market dominated by long-term contracts, are known to be sliding, with some reports showing prices below US$90 per tonne, and molybdenum has lost nearly half its value over the course of the year to trade around US$2.25. Suffering along with the ferro-alloys were the byproduct metals, with cadmium at a decimated US22 cents per lb. Bismuth, at US$3.20, has held up better.