METALS COMMENTARY — Physical demand buoys metal prices

Supported by steadily improving physical demand, metal prices are bubbling near the highest levels seen in years. Investors continue to believe that shortages and higher prices will inevitably result from the economic recovery experienced among member nations of the Organization for European Economic Co-operation.

They may be right — eventually. But in the meantime, investors would be well-advised to remain cautious in the face of seeming prosperity. Consider the following:

Is the raising of interest rates by the U.S. Treasury somehow related to upcoming Congressional elections? Or is there really a slowing in the U.S. economy? If the latter, then rising prices cannot be sustained; if the former, then, unless demand is moderated, prices may rise rapidly. The amount of short-term speculation (as opposed to longer-term investment) in metals markets is increasing. Funds, banks and brokers are reported to be holders of large share positions in metals exchanges, and this may have an erratic effect on prices.

In addition, several large metals companies have, within the past 12 months, disclosed unprecedented losses in metals trading. (As a general rule, most of these companies do not disclose such losses, opting instead to roll them into general metal revenues.) In minor metals markets, “shortages” are already developing.

Further complicating an already complicated situation is the fact that governments have been interfering, yet again, in trade policies. Struggling under the weight of politically motivated terminology — “environmental protection,” “subsidies,” “employment assistance,” “fair trading,” “tax breaks,” etc. — metals markets are pushed first one way and then another. Several European steel producers have indicated that, because of sharply improved demand, they may be unable to continue supplying U.S. markets at current rates. (The U.S. accounts for about 10% of annual supply.) With American producers nearing maximum capacity, and with several announced price increases of 6-8%, U.S. and Canadian governments may soon regret all those recently enacted dumping duties.

To improve aluminum markets and prices, several governments (including Canada) have reached a tentative agreement to reduce aluminum production. The U.S. justice department is now investigating domestic aluminum producers. Russian producers have not cut back to the levels that they promised, and the same Russian producers say they will not maintain present cuts if the Americans do not follow suit.

Elsewhere in most base metals markets, high inventories are stubbornly refusing to decline, and recent fast rises in prices may have been a few months premature.

The following prices and inventories of the London Metal Exchange (LME) are for the month of September, with the corresponding figures for the previous month shown in parentheses:

Rising stocks did not deter investors, as nickel rose to US$2.89 (US$2.66) per lb. and inventories advanced to 144,432 (138,186) tonnes. Repeated merchant purchasing — mainly from the U.S. government’s stockpile tender sales — sent cobalt surging to US$28.50 (US$23) per lb. African and Russian producers continued to report ever-lower output as Western producers scrambled for additional concentrate or scrap feed.

Despite the approach of the battery season, lead stocks moved ahead to 371,350 (366,850) tonnes and prices rose to US27.8 cents (US25.9 cents) per lb.

The slowdown in inventory accumulation nudged zinc to US45 cents (US42.9 cents) per lb. as stocks remained virtually unchanged at 1.2 million tonnes. The steady deterioration in inventories on both the LME and the Commodity Exchange (Comex) of New York buoyed copper to US$1.13 (US$1.09) per lb. Stocks fell to 377,695 from 389,130 tonnes.

Despite high inventories, molybdenum oxide rose to US$3.85-3.95 (US$3.50) per lb., the result of producer discipline and rising steel demand. Buffeted by currency and inflationary fears, precious metals were more active; gold rose to US$391.37 (US$380.21) per oz. while silver jumped to US$5.52 (US$5.19).

There was no cause for concern among platinum group metals. Falling Russian production and steady physical demand kept platinum slightly ahead at US$417.19 (US$412.30) per oz. Palladium was unchanged at US$152.99 (US$152.17) per oz. and rhodium eased to US$800 (US$850) per oz. — Jack Dupuis is a metals agent, broker and consultant specializing in the marketing of mining properties.