Bulls run in metals markets

Metals markets are looking increasingly bullish: copper and aluminum have both achieved new highs in the current cycle; nickel and zinc are trading at just below their recent highs; and even gold has moved above its early-year lows. Financial markets have also regained their composure, notwithstanding recent hints from Federal Reserve Board Chairman Alan Greenspan that U.S. interest rates will rise.

In a recent Reuters poll, analysts were asked to forecast metals prices in the years ahead, and most projected substantial increases for 2000. Our own forecasts are a little below consensus levels, mainly because of the likelihood that interest rates, in the second half of the year, will start to bite in Europe and the U.S.

Copper and aluminum have firm overhead resistance and may have to consolidate in the short term, with other London Metal Exchange metals perhaps following suit. However, once consumer demand picks up again, the prospects for further price gains are good.

Another wave of fund buying and covering against options exposure pushed copper prices to fresh highs; on Jan. 12, the LME 3-month price briefly bobbed above $1,900 per tonne for the first time since April 1998. According to the Reuters poll, the average LME cash price projected for 2000 is $1,840 per tonne — a 17% improvement over the 1999 average of $1,574. Indeed, some analysts have raised their forecasts as high as $1,980.

Our own forecast for copper in 2000 is $1,740 per tonne. The combination of several factors — slowing demand in the U.S.; an end to restocking in much of the Far East; high levels of unreported stocks of both scrap and refined metal; vulnerability to forward selling by producers — suggest that the red metal may have to struggle to hold on to its gains, particularly in the seasonally slower second half of the year.

In the short term also, copper looks vulnerable. Funds were the main source of upward pressure on price before Christmas, and this is still the case. Consumers have yet to return in force to the market, either for extra physical unit or hedge buying, and, if funds do decide to liquidate, a test of support at $1,800 per tonne is likely.

Last week’s speculative buying was focused mainly on copper. As a result, aluminum failed to make fresh highs but traded solidly in a range of $1,650-1,670 per tonne. Aluminum will, over the next few weeks, be less vulnerable than copper to fund liquidation. The market began the year in good health, having made an especially strong start in flat-rolled product markets in Europe and North America, where order books are full and lead times widening for common alloy products. This demand is feeding through into the primary market, with premiums firm in Europe and rising in the U.S. LME stocks are trending slightly downward (having shed more than 10,000 tonnes since the beginning of January), and recent data show that producer stocks of primary fell about 4,000 tonnes in November 1999.

Nervousness over alumina supplies and tightness in forward LME spreads are providing solid underpinning to current price levels, and a test of $1,700 per tonne is expected in the near-term. However, a short-term setback, with prices falling back below $1,650-1,640 per tonne (or lower), is not inconceivable.

Two small Chinese smelters reported that they’ve been considering cutbacks as a result of high alumina prices. Between them, the two plants at Yonghe and Qinyang produce about 45,000 tonnes of aluminum per year. However, there is also evidence that high prices are encouraging alumina producers to raise output. In its next fiscal year, India’s Nalco is scheduled to boost production by 5% to 950,000 tonnes, whereas China’s Shanxi intends to crank out 1.2 million tonnes, up 6% from the previous year.

Nickel prices wobbled in early January, but, thanks to consumer buying, good support was found at $8,080 per tonne. Speculative short covering recently triggered a price boost to almost $8,300 per tonne. In the short term, however, the market will have to struggle to rise above this level. Initial support will likely be at the $8,000 level, and, if this gives way, a move to $7,600-7,700 per tonne could follow.

Supply issues dominated the news last week: Falconbridge reached an agreement with workers at Falcondo; Larco announced a higher production target for the current year; Inco’s Manitoba plant returned to full production; and combined output from Bulong and Cawse climbed to 3,800 tonnes in the fourth quarter (double the third quarter rate), according to analysts who visited the sites.

Despite these signs of rising production, we expect the market to remain in substantial deficit in the first half of 2000, which should, in time, boost prices to above $9,000 per tonne.

With the exception of nickel, zinc has performed less strongly than any other major LME metals so far this year. On Jan. 14, the LME cash price was $1,211 per tonne — almost $35 less than on the final trading day of 1999.

A test of support looks likely over the few weeks, initially at $1,180 per tonne.

Gold staged a steady recovery in mid-January, continuing its climb away from $280 per oz. Prices failed to pierce resistance at $285 per oz. on Jan. 21 and will probably remain steady until the next U.K. gold auction, on Jan. 25.

Liquidity has eased since the start of the year, increasing the possibility of producer hedging and fresh short-selling. However, with the Asian festival season getting under way (specifically, the Indian wedding season and the Chinese new year), physical demand should lend enough support to prevent gold prices from falling significantly below $280 per oz. again.