Boliden (May 22, 2000)

Base metals markets showed further encouraging signs of responding to strong fundamentals during the report period May 8-12, with copper, nickel and zinc prices ending the week firmly. However, aluminum prices continued to lag, and the recent announcement that Alcan is to join Alcoa in restarting idled capacity in the second half of this year does nothing to improve matters.

On May 12, after a week in which copper spreads continued to tighten and London Metal Exchange (LME) stocks remained firmly on their downward trend, copper prices finally came alive. The red metal broke convincingly through the US$1,800-per-tonne level to reach US$1,832 — the highest level for the 3-month price since Feb. 25.

A key feature of the copper market in recent weeks has been a tightening in nearby spreads. The LME cash-to-3-month spread ended the report period at around US$18 per tonne, though it traded down to a low of US$16 per tonne earlier on, and cash-to-May traded at a small backwardation before moving back to level. The emerging tightness has its origins in the rapid drawdown in LME stocks over the past eight weeks.

Total LME stocks are lower than they have been in more than a year, and if the 78,000-tonne total of cancelled warrants is also subtracted, then the amount of material theoretically available in LME warehouses is only 580,000 tonnes. Even this total is probably not representative of the amount of material easily available to the market. With consumption growing rapidly, owners of warrants in good premium locations are unlikely to surrender their holdings quickly.

An unknown but possibly significant portion of LME stocks is thought to be held in rental deals, based on metal remaining in warehouses for a considerable period of time. Again, holders of warrants for this material are unlikely to release them to the market except in extremis. These factors suggest that if the recent high level of LME stock withdrawal continues, cash and nearby dates will continue to be bid up, causing further tightening of spreads.

We doubt that all of the 186,000-tonne stock fall that has occurred since early March is related to demand, but even if only half of this total has gone into immediate consumption, the market is still in significant deficit. Figures released by the International Copper Study Group (ICSG) support this view, suggesting that the copper market was in a deficit of around 15,000 tonnes in February — traditionally a quiet period for consumption. The ICSG calculates that consumption rose a substantial 5.2% in the first two months of the year, outpacing growth of 4.5% in refined production.

The situation regarding production at the Grasberg mine in Irian Jaya, Indonesia, following a recent accident, remains uncertain. The Indonesian government says it will not order Freeport to suspend production at the mine but that the dumping of mine overburden close to Wanagon Lake, where the accident happened, must cease. Freeport’s mine plan was based on large-scale dumping of mine overburden in this region, and it is not clear how the order will affect production levels at the mine.

The LME 3-month aluminum price remained trapped in its recent narrow trading range of US$1,460-1,490 per tonne during the report period.

LME stocks of aluminum continued to fall rapidly, down by another 31,050 tonnes. We believe that the bulk of this material is going into consumption since withdrawals and cancelled warrants are widely spread between different warehouse locations. However, with the forward spread making it possible to finance metal off-warrant, the likelihood that at least some of the recent withdrawals reflect an increase in off-warrant stocks cannot be ruled out. Cancelled warrants have trended down from a recent peak of more than 90,000 tonnes to 72,000 tonnes at the end of the report period. LME stock withdrawals are likely to decline as the market enters the third quarter, and a further fall in cancelled warrants would confirm such a trend.

Nickel prices continued to trade within their recent US$9,500-to-9,900-per-tonne range as the market marked time ahead of labour negotiations in Sudbury, Ont. Prices firmed up on May 12, and there was large borrowing of the nearby spreads, which has caused the cash-to-3-month backwardation to widen to more than US$200 once again.

Noril’sk in Russia has given advance warning that it will be suspending all sea shipping from the port of Dudinka on May 17, owing to flooding caused by melting ice. As a result, exports of nickel and deliveries of converter matte to its own plants on the Kola Peninsula will be halted. Shipments are usually halted at this time of the year for 6-8 weeks because of rising water levels at the port caused by melting snow and ice.

On May 16, Inco’s Sudbury union was to have held a strike mandate vote, the outcome of which may make it possible for workers to be in a legal strike position on May 31, when the current 3-year labour contract expires.

Zinc prices looked stronger as they reached a 3-month high in London on May 12 at US$1,188 per tonne. The last time prices reached a similar range was in January this year, and the last time prices reached US$1,188 on the upside was in December 1999. Prices closed the report period at a high of US$1,175.50 per tonne.

With fundamentals continuing to augur well for zinc, prices seem set to display an upward trend during the second and third quarters. Stocks fell a further 2,775 tonnes during the report period to a total of 247,000 tonnes, and they remain at an 8-year low in an environment of strong demand and growing industrial production.

The level of exports from China is one factor that has prevented prices from moving even higher so far this year. At the beginning of 2000, many feared that an influx of material from China could dampen prices, which had the effect of holding back funds. Chinese exports have increased by almost 50% between the recent first quarter and the corresponding period of 1999. In the first three months of 2000, exports totalled 150,441 tonnes. The flow of material from China goes some way toward explaining why the physical market has remained relatively calm in the face of low LME stock levels and why premiums have also remained fairly static.

Meanwhile, gold prices have moved to a lower, narrower trading range. The psychologically important level of support at US$275 per oz. held again, despite being tested on May 9 and May 11. The tone for the week’s trading was set on Monday, May 8, when prices continued to fall from the previous Friday’s close. For the rest of the week, the market remained subdued and saw prices hemmed into a tight trading range of US$276-277 per oz.

By the start of the report period, the Swiss purportedly had already sold 6 tonnes, and around 114 tones were still sitting on the shelf waiting to be sold before September. With a further 25-tonne Bank of England auction set for May 23, central bank sales have come to the fore again in the gold market. The report period’s static trading range seems set to continue ahead of the next auction, following the pattern of all trading periods prior to the Bank of England sales.

We suggested, some weeks ago, that prices would find firm support at the US$275-per-oz. level, and this has so far happened. Gold, however, is severely wedged between a rock (in the high US$270s range) and a hard(ish) place (at US$275). The pressures on the yellow metal are strong on the downside and weak on the upside, so we believe that resistance will be stronger than support. However, with commodity-traders holding back until the next auction is over, we do not expect the downside for prices to be tested in the immediate future.

— The opinions presented are solely those of the author and do not necessarily represent those of the Barclays group.