Base metal prices largely continued to trade sideways in low volumes during the report period Feb. 12-16. Lead was the only gainer on the London Metal Exchange (LME), as the average cash price gained 1.5% over the previous week. Elsewhere, nickel was the biggest loser (down 4.7%), owing to a weaker 3-month price accompanied by an easing in nearby spreads. Copper and aluminum were down 0.3% and 1.5%, respectively.
Despite some strong U.S.economic data — January housing starts showing a 5.3% gain, month-over-month, as did retail sales, increasing by 0.7% — there are no clear indications regarding metals demand. Another cause for concern is a 0.7% increase in the U.S. producer price index. We do not think this is indicative of inflationary pressures (intermediate goods prices rose just 0.2%), and Federal Reserve Board Chairman Alan Greenspan recently flagged up the likelihood of further rate cuts. However, the strength of oil prices could be at risk, particularly if gasoline prices spike as the driving season in the U.S. gets under way. (West Texas Intermediate prices are still close to US$30 a barrel, and most forecasters expect the average for the year to be around US$25.) A weaker euro and a soft start to the year for European metals demand, combined with poor prospects in some major Asian markets, are keeping consumers fairly inactive. As a result, small funds are dominating volumes. In this environment, sideways-trading looks set to continue, though nickel looks vulnerable to the downside if a settlement can be reached by striking workers at the Sudbury, Ont., operations of Falconbridge.
Copper prices tried but failed to end the week above the key chart level at US$1,805 per tonne on Friday, Feb. 16, after several failures earlier in the week. There is little buying interest at the higher numbers at present. Consumer buying in the U.S. and Europe is non-existent, though there has been some Far East purchases. The stronger-than-expected U.S. housing start, combined with nervousness about production cuts, continues to limit the downside, and we expect a price range of US$1,760-1,810 per tonne for the short term.
An important factor that could lend some support to the copper market over the next few weeks is a resumption in Chinese buying following the end of the new year holidays. China saw its copper imports climb by more than 40% in 2000, and some traders report that buying is likely to be subdued early this year because of high stocks carried over from last year. Inventory held in Shanghai Futures Exchange warehouses is clearly higher than at the corresponding time last year (99,000 tonnes versus 77,0000), though there is some dispute over by just how much the amount of copper held off-warrant in bonded warehouses has increased. Estimates range from as little as 60,000 tonnes to as much as 200,000 tonnes.
At present, the Shanghai/LME price ratio in March copper prices is running at 9.8. Traditionally, Chinese buying interest picks up strongly once the ratio rises above 10, so it is worth keeping an eye on this relationship as an early indicator of any pick-up in Chinese buying interest in copper.
Aluminum prices also failed to break above resistance, falling back several times at US$1,610 per tonne. LME stocks climbed another 23,000 tonnes, and these rising levels are undermining the tightness in nearby spreads. Also, LME cash-to-3-months is now trading at a US$13-per-ton backwardation, compared with more than US$70 per tonne at the beginning of February.
With tightness easing and stocks rising, it is difficult to find much upside potential in aluminum prices. A further production cut is expected to take place at Alcoa’s 200,000-tonne-per-year Longview smelter, in Washington state, but this may not be until McCook Metals takes over the plant in early March; in any case, this cut has already been factored in by the market. Stimulation is now required from the demand side, and here the signs are still uninspiring. In December 2000, in Europe, there was a large increase in stocks of both wrought and unwrought copper (the result of consumer de-stocking toward the end of the year), and the U.S. manufacturing sector is, effectively, in a recession, with utilization at its lowest level in almost nine years. We expect the recent range of US$1,570-1,610 per tonne for LME 3-months to hold for the time being.
Nickel prices dipped sharply to a low of US$6,135 per tonne for the LME 3-month price, finding support just shy of the low for the year so far of US$6,100 per tonne, registered on Jan 3. For most of the week prior to the drop, support at US$6,200 per tonne, where there is steady consumer buying interest, had held. The climb, on Feb. 16, back above this level suggests that US$6,200 per tonne remains a good support level, but it is likely to be tested further over the short term. Meanwhile, producer selling is making it difficult for prices to climb above US$6,400 per tonne.
A key reason for the recent price weakness is a growing feeling in nickel markets that a settlement of the labour dispute at Sudbury is imminent. (The strike was resolved at press time) Last year, the major attributed losses of US$55 million to the dispute.
The expectation that the strike would end is reflected in an easing in nearby spreads. Although very nearby spreads (February-March) remain tight, farther-ahead spreads (March to 3-months) are easing, suggesting that the market expects supply to ease by the second quarter of 2001.
Zinc prices continued to make a slow recovery from their recent lows, without ever suggesting that there is much upside potential ahead. Support now appears to have been established in the US$1,020-per-tonne region, but the US$1,030-1,040-per-tonne level is likely to provide stiff resistance in the short term. LME stocks fell marginally during the report period, by 1,970 tonnes, but, after the previous week’s large net inflow, they remain 43,000 tonnes above their recent lows. After the previous week’s appearance of a large warrant holding in the 50-80% band, the dominant position in zinc has shrunk to one large position in the 40-50% band. Over the same period, zinc spreads have also eased, and cash to 3-months are currently trading at a contango of US$10-11, compared with US$1-4 in the week-ago period.
One thing that has changed in the zinc market over the past few months is expectations regarding the concentrates market. The market now looks considerably tighter than it did in late 2000, the main reason being a big increase in Chinese buying. Although, during the fourth quarter, China was a small net importer of zinc concentrates, more recently it has been a large buyer of material for delivery of up to 100,000 tonnes (gross weight). China’s buying spree is not surprising given the substantial increases in smelter output expected this year.
When treatment charge negotiations began, in October 2000, many market participants were expecting a surplus in concentrates. However, this has failed to materialize, and a roll-over of last year’s terms (around US$189 per tonne) now look probable. Implications for the metal market are minimal, since we still expect a concentrate market surplus (albeit smaller than anticipated) over the next few years.
If anything, the increase in Chinese concentrate imports strengthens our view that Chinese zinc exports are likely to remain at high levels in 2001. Indeed, China’s Shaoguan lead-zinc group says it intends to maintain its zinc exports at 50% of its production, which it intends to raise by around 10% from the current 130,000 tonnes.
Gold prices sunk to a 17-month low during the report period, as the market came under pressure from large spot selling from one major player in the second half. A move up in lease rates some weeks ago suggests that the forward borrowing was done ahead of the spot part of the transaction. Australian producer hedging is thought to be the major source of the selling, suggesting that selling is picking up again after last year’s hiatus.
However, the effects of a major bank sale are evident in the current structure of lease rates. Nearby lease rates have spiked sharply higher in the past few weeks, and this is suggestive of the kind of short-term borrowing that often takes place when a central bank is selling gold that needs to be re-refined in order to meet market specifications. Ironically, the most recent tumble in the gold price came just one day after the World Gold Council (a producer-funded body committed to promoting gold consumption) released its latest estimates of gold demand, showing that gold demand in the fourth quarter of 2000 reached a record high of 894.3 tonnes, climbing by 11% year-on year.
— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.
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