METALS COMMENTARY — Bullish markets are expected as most metal stocks decline

Despite heavy selling in all metals on the London Metal Exchange (LME) in August, steady business was reported by metals consumers, foundries, mills, and steel and stainless manufacturers.

Market conditions for most metals continue to be characterized by volatility. Waves of demand necessitate heavy purchasing, and unsustainable price rises were followed by consumer inventory drawdowns and seesaw prices. The mills, which usually negotiate their monthly purchases at the beginning of each month, always benefit from such selloffs.

Surprisingly for this time of year, exchange inventories maintained their steady decline (except for an apparent stabilizing in copper). Until these inventory reductions show signs of changing direction, bullish markets should be expected.

If world economies remain stable and metal consumption holds close to current rates, the next 12 months should see relatively strong metal prices. Indicating a broad-based and prosperous world economy, sectoral slowdowns, such as autos and home building in the U.S. and Canada, have had little overall impact on total non-ferrous metal demand. Increases in metal consumption continue in Europe, Japan and the Far East. Even Russian demand is increasing in some sectors. And in North America, capital expansions are now adding to metal sales.

Always a precursor of virgin metal demand, scrap sales remain brisk. While Canadian export sales are in reasonably good shape, domestic demand appears to be languishing again. Suggestions that governments can improve, or at least maintain, their overall revenues by reducing or eliminating usurious fees, payroll taxes and similar discouragements to hiring personnel have fallen on deaf ears.

The following prices and inventories on the London Metal Exchange refer to September to date, with the corresponding figures for the previous month shown in parentheses (unless stated otherwise).

The selloff ahead of the Labor Day weekend lowered nickel to US$3.80 (US$4.06), as inventories fell to 63,552 tonnes (66,666 tonnes at the end of August). Nickel cash price levels reached $3.70 per lb. on Sept. 5, before rebounding.

Brisk demand maintained cobalt free-market quotes for Western A Grade at US$28.50 per lb. (unchanged since Aug. 31). Three factors — small declines in mine production, slightly higher refined output from secondary sources, and robust battery sales — had the effect of holding lead steady at US26.9 cents (US28.3 cents) per lb. as stocks fell again, to 222,400 (235,300) tonnes.

Unusually steady seasonal demand supported zinc at US44.3 cents (US46 cents) per lb. as stocks dropped to 756,200 (764,325) tonnes. Unlike the other base metals, it will be a few months before zinc consumers have to worry about shortages and sharp price rises.

While there has been much trade press about the likelihood of overproduction, copper seems determined to wait for clearer directions. Inventories are at levels not seen in years, as consumers absorb most of the new production. Annual world consumption is currently estimated at 13 million tonnes. The combination of inventories on the LME and Commodity Exchange of New York rose to 184,988 (176,937) tonnes, and average August prices on the LME slipped to US$1.34 (US$1.38) per lb. The selloff pushed LME cash to $1.31 on Sept. 5.

A surge in American production added material and hesitation to spot molybdenum oxide prices, which ebbed to $4.10, while producer prices remained nominally around US$4.50 per lb. ($7 at the end of June). The market is apparently full of moly, an indication of which is the decision by one American producer to turn off a mine that had reopened as recently as April. With American marginal output costing $4 per lb., further serious erosion seems unlikely. Meanwhile, precious metals remain relatively listless. Gold ebbed slightly to US$381.06 (US$383.51) per oz. And unlike its richer cousin, silver gained strength, reaching US$5.37 (US$5.38) per oz.

Ignoring news of possible labor stoppages in South Africa, platinum prices drifted lower to US$429.54 (US$424.58) per oz. — as did palladium, to US$145.54 (US$149.57) per oz. Rhodium fell again, to US$400 (US$500) per oz.

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