METALS COMMENTARY — Prices rise, but metal stocks refuse to

Metals markets continue to confound analysts. Inventories are high and rising, yet, inexplicably, prices have bounced smartly off their recent lows.

While the long-term outlook for most metals is good, the short term may be characterized by more misery as governments act and react to protect some industrial and commercial sectors (most of which are undeserving). A few examples follow.

After two years of virtually unrestrained production, several governments, including Canada, Russia and many other aluminum-producing nations, have apparently reached an agreement whereby all suppliers will proportionately cut metal production by an annual amount equalivalent to the current London Metals Exchange (LME) inventory. To persuade Russian producers that cutbacks can work and that co-ordinated supplier action can raise prices, bribes are expected — in the form of Western taxpayer assistance to modify existing Russian plants. Without subsidies (and assuming a level playing field), many Russian plants could not compete and would therefore have to close. Western governments seem averse to facing up to Russian dumping.

Countries of the European Community have so far failed to agree as to which European zinc and lead producers should close. The most recent candidate for closure, MG in Germany, has apparently been kept running by government and bank intervention. Old or outdated plants can be found all over Europe, and they will need taxpayer assistance just to stay open.

The Russian government and the Siberian nickel company known as Norilsk are tendering to upgrade the Pechenga nickel smelter in the Murmansk area. Key bidders in the process are Nordic companies using government-backed (read: taxpayer-backed) financing.

Downwind, Nordic governments want to reduce air pollution by cleaning up the plants in this area. Economically, the Pechenga plant is not required; it was kept open so that Norilsk could haul ore by public rail across some 2,500 miles. When market freight rates were implemented, Norilsk naturally decided to smelt the ore and ship concentrate to the refinery in the Murmansk area. At US$150-plus per long ton (2,240 lb.), steel scrap prices are at record levels — double what they were a few years ago and likely to rise again. Reflecting the growing world shortage of iron units, Poland moved recently to ban exports of iron and steel scrap. One trade group in the United Kingdom has proposed similar action.

Once governments, for whatever reason, begin to finance commercial ventures, a penalty or advantage to one group or another is created, and troubled markets are perpetuated. The old axiom, “If it isn’t good for everybody, it isn’t good for anybody,” certainly applies.

As a result of soaring prices in scrap markets, producers of iron ore may soon see better prices, as well as interest in new capacity. Contrary to the expectations of many nickel producers, it appears prices for non-ferrous metals are easing under the weight of growing inventories. Russian nickel deliveries are continuing at previous rates, but some of the material is thought to be arriving via alternative channels. The net result, nevertheless, is the same: “Grey nickel units” displace regular sales which, given the producer’s policy of selling all output, eventually find their way onto the LME as higher inventories. The grey units even displace official Russian exports.

The following are average LME prices as of Feb. 16, with the previous month’s figures shown in parentheses:

Nickel rose to US$2.64 (US$2.53) per lb. as inventories bounced up to 131,352 (128,826) tonnes.

While market traders are forecasting still higher prices, cobalt consumers are limiting purchases to bare necessities. Taking the edge off the usual demand, Japanese suppliers possess several months’ worth of inventory and the U.S. government sells monthly from its stockpile. As a result, cobalt prices eased. Western brands are at US$21 (US$23) per lb., with Russian counterparts at US$16-17 (US$19).

In a complicated race between falling Western mine production and good seasonal demand, lead prices stayed ahead at US22.5 cents (US22.2 cents) per lb. as stocks increased again to 324,900 (321,150) tonnes.

Unresponsive to market fundamentals, zinc stocks surged again to 1 million (998,325) tonnes as prices remain virtually unchanged at US44.5 cents (45.2 cents) per lb. Demand is still good in the U.S. but down elsewhere. Continuing to show healthy signs, copper prices advanced, reaching US84.6 cents (81.9 cents) per lb. as the combination of LME and Commodity Exchange of New York inventories declined again, to 632,601 (653,314) tonnes. Amidst much speculation of U.S. producers resuming operations (but on little real news), molybdenum oxide prices steadied at US$2.75-2.85 (US$2.80) per lb. Precious metals markets are churning but have yet to signal any clear direction. Gold tested its upside and retreated to US$382.86 (US$387.11) per oz. Confirming its recent upsurge, silver continued its advance and moved ahead to US$5.27 (US$5.14) per oz.

Except for rhodium, platinum group metals showed strength and remained in a bull market. Platinum reached US$391.33 (US$387.97) per oz. and palladium was ahead at US$129.41 (US$124.32) per oz. Rhodium was down again, to US$825 (US$850) per oz.

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