METALS COMMENTARY — Action brisk for base metal markets

Base metal markets are brisk in all respects. Smelters and refineries are running flat out, constrained only by their ability to acquire mine feed, and all publicly traded metal prices surged upwards in early November. As a result, some profit-taking should occur as investors re-evaluate demand and stock movements.

Low prices and the sluggishness of the government approval process are curbing some mining capacity expansions, and it will take several months and continued higher price levels to raise production significantly. Most short-term increases are likely to be either low-cost, incremental expansions or reopenings of high-cost operations put on standby during the recent recession. Industries with significant capacity for this type of expansion capability are aluminum, nickel, zinc and molybdenum. Most of the bigger mining houses usually have at least one new expansion project under way, which accounts for why overall industry capacity and output have held or grown slightly — even during the recession. An exception is the large-capacity increases for copper and byproduct molybdenum scheduled to come on-stream during the next few years. While some of this new output will replace declining output from existing mines, a large net increase is expected.

Elsewhere, currency and financial considerations continue to gain importance. Soaring world demand for finished product is causing double-digit prices, shortages of raw materials, and some alarm over government inflation. Market-watchers expect the U.S. Federal Reserve to lead the inflation attack with another rise in interest rates (making up for their inaction before the recent mid-term elections). Similar and quick action will likely come from other countries, such as Canada, which are eager to ensure that their rates and deficit financing loans remain competitive. Even a brief hesitation might result in a run on a country’s currency, as investors opt for better returns. While investors and consumers will tolerate reasonable increases for any product, sharp moves sometimes puncture tolerance thresholds, precipitating drops in confidence and overreaction.

The following prices and inventories of the London Metal Exchange (LME) are for the month of November to date, with October’s figures shown in parentheses.

Still underpinned by good physical activity, speculation pushed nickel to US$3.362 (US$3.062) per lb. as inventories advanced slowly to 150,498 (149,262) tonnes. Daily spot values reached US$3.42 before slipping. Consumer resistance and barely adequate supplies are holding free-market cobalt prices at US$26.50 (US$26.50) per lb. As a result of the problems in Zaire and Zambia, Falconbridge is now the largest Western cobalt producer. Good fundamentals and steady demand improved lead to US30.3 cents (US29.1 cents) per lb. as stocks fell to 367,225 (371,150) tonnes.

Investors edged zinc prices to US52 cents (US48 cents) per lb., as stocks remained at the 1.2-million-tonne level.

The combination of inventories on the LME and the Commodity Exchange of New York fell to 335,828 (353,007) tonnes as copper jumped to US$1.23 (US$1.16) per lb. The daily spot price reached US$1.26 before easing.

Strong demand for steel kept contract molybdenum oxide price quotes in the range of US$4.10 per lb. (unchanged from last month); spot quotations ran as high as US$7.

Ignoring currency and inflation concerns, investors quietly dropped gold to US$383.92 (US$390.25) per oz. and silver to US$5.23 (US$5.46) per oz. In quieter markets, platinum group metals were steady, with platinum at US$413.58 (US$419.42) per oz., palladium at US$158.34 (US$154.66) per oz. and rhodium at US$700 (US$700) per oz.

Expectations that the strong auto sector will persist in trying to switch from the present tri-metal products to a higher-palladium catalyst with a lower overall cost kept palladium prices strong.

— Jack Dupuis is a metals agent, broker and consultant specializing in the marketing of mining properties.