Metals prices showed signs of bottoming out early in the report period Nov. 6-10, but failure to break above key resistance levels brought more liquidation and short-selling on Nov. 9 and 10. Prices weakened further on Nov. 13, and a test of support levels in the days ahead now looks likely. Lead, copper and zinc were the biggest losers in the base metal complex, shedding 1.5%, 1.3% and 0.5%, respectively, compared with the previous week’s average prices, and aluminum, nickel and tin may have to struggle to hold on to whatever small gains they made.
The copper market could hold the key to short-term price direction for the rest of the base metals complex. Aur Resources’ announcement that it has completed its forward sale of 164,000 tonnes of refined copper means that one source of selling has now been eliminated. The switching of fund positions on the Comex to net short from a large net long position just a few weeks ago has also added significantly to the recent selling pressure. If this is now abating as well, copper prices may have the chance to rally. However, judging by the action on the London Metal Exchange (LME) on Nov. 13, one more step down in price to the US$1,780-per-tonne region may be necessary first.
Copper prices continued to form a base in the low US$1,800-per-tonne region. Toward the end of the report period, prices picked up, but the LME 3-month price struggled to climb convincingly above the 10-day moving average, at US$1,835 per tonne, and fell back again on Nov. 10. If this level can be overcome, buy stops above the market at US$1,850-1,860 per tonne may be targeted. For the time being, however, a test of the downside looks more likely.
There have been two main sources of selling pressure in copper in recent weeks, but the signs are that these may now have run their course. Aur Resources completed its forward sale of around 164,000 tonnes of copper, 70,000 tonnes of which were sold forward in 2001, with the remainder sold forward in 2002-2004. The forward sale is linked to a financing arrangement for the company’s purchase of a share in the 75,000-tonne-per-year Quebrada Blanca mine in Chile.
In addition, the fund sales that have seen the Comex’s net fund long position shrink to a short of minus 5,538 lots from plus 28,836 lots in the past six weeks (equivalent to sales of almost 400,000 tonnes copper) appear to be abating.
Also positive is the International Copper Study Group’s estimate of the global copper deficit of 400,000 tonnes for the first eight months of the year. The estimate suggests that the 420,000-tonne fall in LME stocks since the end of 1999 is a fair reflection of the strength of market fundamentals this year.
In a week of quiet range-trading, the LME 3-month price for aluminum mostly traded within the boundaries set by the 10- and 30-day moving averages. However, prices weakened on Nov. 10, falling below the 10-day moving average to hit a low of US$1,473 per tonne. Market news was mixed, and until there is a concerted recovery in the euro and copper strengthens, aluminum’s price prospects are likely to remain subdued, with US$1,500-1,520 a difficult hurdle to overcome for the LME 3-month price.
Recent data have confirmed the weakness in demand for U.S. aluminum product, but there appear to be some signs of a bottoming out in the rate of order decline. Total orders fell 11% year-on-year in October — a little slower than the previous month’s decline of 12%. Excluding can sheet, which has been particularly weak recently, orders fell 14%, compared with a 20% fall in September.
Nickel prices ended the report period trading just above the 10-day moving average at US$7,140 per tonne. A 354-tonne increase in LME stocks (further evidence of weakening fundamentals) had little negative impact on the LME 3-month price, which has continued to hold on to its recent gains despite widespread expectations that another step lower is imminent. One factor that is helping to keep prices firm is the continued wide backwardation, combined with a low level of LME stocks. These two factors are discouraging any aggressive short-selling.
The main reason for poor nickel market sentiment is the growing evidence of poor demand — partly a reflection of the large quantities of stainless steel scrap that have emerged as substitute for primary nickel. However, overstocking in stainless steel is exacerbating the situation. One puzzle is that despite the large LME backwardation, little material had been shipped into LME warehouses, where total stocks have remained at 11-12,000 tonnes for many weeks. However, the recent net inflow of 354 tonnes suggests that an upward trend may be in the offing.
The market is still watching the strike situation at Falconbridge’s Canadian and Norwegian operations. Behind-the-scenes talks to settle the strike at Sudbury, Ont., broke down, which raises the possibility that it could last well into next year. Workers at the Nikkelverk refinery were to have started a 5-day strike on Nov. 15.
Zinc prices have been volatile. After hitting 4-week highs on Nov. 9 to edge just above the US$1,100-per-tonne mark, zinc failed to make further gains, resulting in liquidation. Consequently, zinc lost all its gains, and prices fell back through support at US$1,085 per tonne to a low of US$1,073 per oz. Prices recovered only slightly on Nov. 10, and then went on to give up further ground, falling back to fresh lows of US$1,070 per tonne.
Figures from the International Lead and Zinc Study Group show that zinc’s fundamentals were still firm in August. Refined production rose to 747,800 tonnes, an increase of 1.1%. Refined consumption rose more quickly, to 712,600 tonnes, an increase of 3.2%. The figures also showed a tightening of the stock-to-consumption ratio to 5.1 weeks in August, down from the previous month’s 5.2 weeks.
Despite these positive signs, we nonetheless believe that, by year-end, the situation will have reversed. Indeed, as these figures relate to the position in August, the situation has probably already changed to one of production beginning to overtake consumption growth. As zinc moves farther into surplus by the end of the year, upside price potential will be harder to find. We believe zinc’s difficulties in overcoming psychological resistance at US$1,100 per tonne are indicative of its short-to-medium-term price potential.
Gold prices performed weakly during the report period, especially when the confusion in the U.S. presidential election and the ensuing weakening of the U.S. dollar are taken into consideration. Instead of finding strength from a weaker U.S. dollar, gold prices remained in the US$263-to-266-per-oz. range for the second week running.
A third wave of European Central Bank intervention brought some support to the euro. But neither this nor a positive Bank of England gold auction (3.3 times oversubscribed at a price above the morning fix) provided much upside to the gold price.
One aspect of the weak gold market is the disappointing level of physical gold demand. Demand from India, the world’s largest consumer of gold, is said to be particularly poor. In 1999, India imported 574 tonnes of gold, down from the 1998 level of 614 tonnes, according to figures from the World Gold Council. Reports from India suggest that levels in 2000 have so far been as much as 50-60% below those of last year. Adverse weather conditions have led to a poorer harvest, and the rupee has continued to lose value against the U.S. dollar.
— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.
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