METALS COMMENTARY — Metals markets gathering strength

So far this year, those metal sectors that themselves consume metals seem to have excaped the problems affecting the stock and bond areas.

Companies in the steel, alloys and stainless sectors are all operating at high capacities. In fact, definite signs of strain have appeared in many areas, particularly the U.S. and Canada.

Poor weather in Europe and North America during the first quarter slowed some operations, but this is expected to aid sales in coming months. At the same time, prices for many basic manufactured goods are under growing pressure. This is due to three factors: the tendency of most companies to keep inventories at minimum levels; good demand; and shortages of some materials, Unfortunately, the relatively high inventories of base metals are not expected to affect prices for raw materials significantly — at least not until consumers see a definite decline in the stocks on the public exchanges. On the plus side, consumption of most metals is holding up reasonably well and any interruptions in supply would accelerate the drawdown of exchange stocks.

Several factors will affect base metal prices over the next few weeks: * The low prices of recent months are slowly and grindingly forcing some mine operations to curtail production. However, until producers are unable to meet demand and until consumers are forced to turn to the exchanges for metal requirements, it is unlikely that we will see sustained, higher prices for many metals.

* In Europe and North America, the very high cost of boosting production capacity has made it more attractive to operate smelters and refineries at maximum volumes to keep unit costs to a minimum.

* The ready availability of new equity through share issues has encouraged base metal processors to maintain this course of action. Falling stock markets and higher interest rates may slow their ability to raise equity. * Having established their supplier position in western markets, some former east bloc metal suppliers are finding it difficult to operate profitably, as energy and transport prices move to market levels.

* Higher offerings of Russian material in North America have failed to alter substantially U.S. prices and delivery volumes.

Average prices and inventories on the London Metal Exchange (LME) in March are provided below, with February’s figures shown in parenthesis. Nickel eased slightly to US$2.53 (US$2.64) per lb. as inventories continued their slow rise, reaching 136,284 (128,826) tonnes. Producer premiums are reported to be easing, but very slowly.

While attempting to develop alternatives, consumers have reluctantly begun buying cobalt at ever higher prices. Western brands finished the month at US$26 (US$21) per lb., with Russian products sitting at US$22 (US$18). Although inventories are still high, shortages of mine output and further production cuts kept lead prices steady at US20.5 cents (US22 cents) per lb. as stocks increased again, to 334,800 (330,775) tonnes.

Zinc stocks surged again, also, to 1.1 million (1 million) tonnes as prices eased slightly to US42.5 cents (US44 cents) per lb. Low prices are expected to place zinc producers under further pressure in coming months. Good consumer demand, particularly in the U.S., kept copper prices firm at US86.9 cents (US84.7 cents) per lb. as the combination of inventories on the LME and the Commodity Exchange of New York declined sharply to 543,941 (653,314) tonnes.

With production resuming at Thompson Creek in the U.S., molybdenum oxide prices continue to sit at US$2.75-2.85 (US$2.80) per lb. as markets wait to see if the added volumes can be absorbed.

In precious metals, the looming election in South Africa is the main concern of investors, speculators and consumers. The next government will be under some pressure to “fix” perceived problems and will need access to additional funds. Until events unfold, investors will hold or increase their net positions. As a result, gold prices rose to US$384.18 (US$381.66) per oz. Meanwhile, silver continued to confirm its bull market by moving up to US$5.44 (US$5.25) per oz. Falling production of zinc and lead will also affect silver.

Buyers continue to add to positions in platinum group metals. Platinum reached US$400.29 (US$393.68) per oz. and palladium was also ahead, at US$133.07 (US$131.74) per oz. Still reflecting a slight surplus, rhodium was down to US$730 (US$800) per oz.

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