METALS COMMENTARY — Metal prices gathering steam

The strong markets that started the year continue to benefit from reasonable demand and speculative activity on the part of investors, particularly in base metals.

Stock markets normally lead physical metal price upturns by at least several months. In this cycle, investors, spurning market fundamentals, are marching metal prices to a new tune. If the investors are right — and they often are — base metal prices may begin dancing this spring. In the physical markets, only reasonable growth is expected. Economists are betting on a 3% real improvement in 1994. The U.S. recovery is well under way, with Canada trailing a few months behind. Consumer spending, steel shipments and housing starts are rapidly getting better. Europe is slowly improving and Japan, which appears to have touched bottom, may be ready for a rebound.

However, the improved prices for most metals are still well below producer costs and most 1993 annual results (due shortly) will be dreary reading. There is still too much production for current needs to allow inventories to fall, and this must eventually affect prices.

In Germany, the announcement that Metallgesellschaft (MG) was insolvent to the tune of US$1.6 billion and seeking bank support sentshivers rippling across the metal industry and many mine managers running to check title and payment terms in their refining contracts. MG and its subsidiaries are some of the largest refining companies in the world, producing aluminum (39,000 tonnes), copper (212,000 tonnes), lead (143,000 tonnes) and zinc (193,000 tonnes).

To feed these plants, MG mines, buys from a wide variety of feedstock. The announcement — sudden and astonishing for a company of this stature — has been attributed to speculative losses in oil futures, yet there is still an amazing lack of detail. It takes a lot of effort to lose that much money in one or two quarters. Based on the various asset sales during the last many months, one has to suspect the company’s problems have been known for some time.

The sudden loss experienced by MG highlights the need for senior management of any large public company to disclose, on a timely basis, the potential impact of all off-statement policies which result in possibly substantial financial exposures. In mining, examples include buying or selling metal options and contracts.

Spurred upwards by investors and good stainless steel demand, average-to-date January nickel prices on the London Metal Exchange (LME) rose to US$2.46 (US$2.323) per lb. as LME inventories bounced up to 127,116 (124,104) tonnes. (Here and henceforth, last month’s figures are shown in parentheses.) Cobalt prices advanced again as producers withdrew most spot sales activity and the African producers announced they would keep their list price of US$18 per lb. Prices reached the US$23-24-per-lb. range on strong trader turnover and some consumer activity, although most have moved to the sidelines, awaiting further news. With low stocks, however, waiting can not last too long. Western brands are at US$23 (US$12) and Russian products are US$22 (US$11).

Continued cold weather and falling refinery output kept LME lead prices ahead at US22.7 cents (US21.4 cents) per lb. as LME stocks also edged up to 305,750 (303,650) tonnes.

LME zinc stocks surged again, reaching 951,075 (906,700) tonnes as prices rose to US44.8 cents (US44.2 cents) per lb.

LME copper prices steadily advanced in January, reaching US79.3 cents (US78.1 cents) per lb. as the combination of inventories on the LME and the Commodity Exchange of New York also rose, to 678,799 (666,655) tonnes. Precious metals trading remains generally bullish but is showing mixed signals as previous highs are about to be tested. Gold is ahead at US$388.66 (US$383.24) per oz. and silver surged to US$5.11 (US$4.97) per oz. — Jack Dupuis is a metals agent, broker and consultant specializing in the marketing of mining properties.