METALS COMMENTARY — Investors find metals to their liking

Metals markets opened in September on a higher note as continued strong physical demand finally sent short sellers running for cover as optimistic investors stormed into most metals.

Ignoring the good North American and the fast improving European and Japanese economic gains, many market players were betting, based on rising inventories, that prices would sag substantially below current levels. However, while inventories are still nibbling upwards in some cases, they appear to be topping out.

Total world second-quarter demand figures are all expected to show tremendous gains over the first quarter of 1994 and this trend is expected to continue for at least the third and fourth quarters.

Depending on whether you are buying raw materials or selling finished products, metal markets have been communicating, for many months, good, bad and sometimes ugly news. On the backs of a sustained consumer spending spree, we are entering a period of fairly strong growth for metals related products. While good price gains for some metals may have to await the decline of substantial inventory overhangs to whatever normal levels are appropriate, further steep price declines are not expected until the current boom has run its course.

Treasury efforts to steady the strong U.S. economy appear to be successful. U.S. steel and alloy demand remains strong as manufacturers have been building inventories to secure prices and to better meet their customer needs. The net result is, however, straining capacity utilization, slowly gathering price increases and so far only mild shortages.

Reflecting this strength, U.S. domestic scrap metals are in good demand, leaving export availability down and tightness or shortages in Japan, South East Asia and Europe. Steel and alloy consumers in these markets have until lately been operating at reduced capacity, using smaller tonnages and in recent years securing some of their needs from CIS suppliers who have been steadily faltering with their tonnages.

With sharply rising economies, this situation has caused and is expected to further cause increasing shortages of scrap raw materials, forcing consumers to either bid prices up or, more difficult from an operating and price perspective, switch to alternative materials such as virgin forms of the scrap components.

Ignoring rises in LME stocks, rumors of more Russian nickel arrivals and the last-minute settlement of a labor contract at Falconbridge on Aug. 31, investors pushed average LME prices to date in September (with August numbers in parentheses) for nickel to US$2.839 (US$2.659) per lb. as LME inventories grew to 140,034 (138,186) tonnes.

Anticipating strong markets, merchant activity continues to improve prices and flush out buyers at higher tags, as cobalt prices regained most of their early summer losses, reaching US$24 (US$23) per lb.

Jumping into the current battery season, and showing signs of an end to the long inventory growth trend, LME lead stocks eased to 364,725 (366,850) tonnes, and prices rose to US27.2 cents (US25.9 cents) per lb. Also showing some signs of topping out in inventories, at least temporarily, zinc struggled to US44.6 cents (US42.9 cents) per lb. on the LME as ever rising stocks reached 1,240,100 (1,234,150) tonnes.

Still attributed to seasonal factors, the combination of LME and Comex inventories rose to 393,208 (389,130) tonnes as LME copper prices also rose to US$1.129 (US$1.091) per lb. New Chilean production and producer hedging are expected to cap any sustained upward price movements in the red metal for a while.

Having surged more than US$1 per lb. in the last half-year, molybdenum oxide prices continue to consolidate around US$3.50 (US$3.50) per lb. Improving steel demand and increased production may stall them at this level until the market evaluates whether inventories are being drawn down.

On little real news in precious metals, gold rose to US$386.83 (US$380.21) per oz. and silver jumped to US$5.42 (US$5.19) per oz.

In the platinum group metals, labor problems in South Africa, good economic news elsewhere and strong Japanese buying kept the group steady. Platinum rose slightly to US$414.38 (US$412.30) per oz., as did palladium to US$152.93 (US$152.17) per oz. Rhodium was unmoved at US$830 per oz.

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