Metals markets show signs of nervousness

It is unlikely that these downward adjustments signal much more than consolidation in the current uptrend for prices. Technical indicators had suggested that almost all the major metals were heavily overbought following the big gains of the previous week (Sept. 4-8). However, there is little doubt that metal market fundamentals are strong at present, and, quite probably, the recent highs will be tested again shortly.

We nonetheless continue to be cautious about medium-term price prospects. The International Monetary Fund recently warned that if oil prices of more than US$30 per barrel are sustained, world economic growth could be reduced by 0.3-0.5%. With the U.S. economy showing signs of slowing down, such a reduction could push global growth below 3% next year, following an increase of around 4.7% this year. There is already evidence that de-stocking is exacerbating the impact on metals demand in the U.S. European metals consumption is also likely to slow down following its sizable gains in the first half of 2000. Metals demand indicators need to be watched closely over the next few weeks for any further signs of deterioration.

After climbing to fresh 33-month highs of US$2,036 per tonne, copper prices eventually closed weakly, succumbing to overbought technical indicators and a lack of follow-through buying by consumers. Nearby support levels are likely to come in for a test, with US$1,990 per tonne the immediate target.

There is little doubt that prices for the red metal are benefiting from extremely strong fundamentals. Global copper consumption grew by 7-8% in the first half of the year as demand was boosted by strong economic growth in all regions.

The question now is, Will the fundamental strength persist? Recent data suggest that the U.S. economy is slowing down. Meanwhile, European demand has yet to regain its early-year strength, following an abnormally quiet July and August, and buying from this quarter will continue to be hampered by the weak Euro. A sharp rise in Shanghai Metal Exchange stocks would seem to confirm that China purchased significantly more copper than it needed in the first half of the year, and that much less buying can be expected.

We expect refined production to accelerate in the second half of this year. Representative spot treatment and refining charges are consolidating at the US$80-per-tonne and US8-per-lb. level, respectively, from US$60 and US6 earlier in the year — a sign that refinery utilization is accelerating relative to mine supply. This acceleration is a reversal of the situation experienced earlier this year when various smelter production problems robbed the market of up to 100,000 tonnes of refined copper. Better production levels at Boliden’s newly expanded Rnnskr smelter in northern Sweden should help boost output levels.

However, the market is finely poised, and although we believe a downside correction from current price levels is probable, there are considerable upside risks. The extent of the deficit in the first half of 2000 (around 350,000 tonnes) suggests that even if the gap between supply and demand narrows, the market is unlikely to move into substantial surplus, and inventory will not rise much from its current low level. Consequently, prices are likely to be well-supported and could continue to rise if speculators decide to buy now in anticipation of further market strength during the seasonally strong first half of next year.

Aluminum prices adjusted lower on Sept. 15 after a small amount of liquidation. Aluminum’s descent from its high of US$1,667 per tonne earlier in the report period was eventually halted by support at the 10-day moving average at US$1,632 per tonne. If this gives way, prices could move quickly back to the US$1,600-per-tonne level.

The International Primary Aluminium Institute (IPAI) reported a build-up of 64,000 tonnes for July, the first such increase this year. The increase means that the total reported stocks figure for July (IPAI, London Metal Exchange and Japanese port stocks) climbed 34,000 tonnes after falling 234,000 tonnes in June. We would advise against reading too much into one month’s figures, and it is unlikely that the July data signal the start of an upward trend in stocks. Indeed, since the end of July, LME stocks have fallen a further 83,000 tonnes.

The producer inventory figures show that the largest regional increase — a gain of 24,000 tonnes — occurred in North America. This reflects a slowdown in U.S. aluminum consumption, which is being exacerbated by de-stocking of products all the way through the supply chain. Just how severe this downturn will turn out to be is anyone’s guess.

Zinc prices weakened dramatically late in the report period, with the 3-month price ending at US$1,170 per tonne, or just above support levels. Surprisingly, the zinc 3-month price failed to gain much support from a tightening of nearby spreads as the cash-to-3-month backwardation reached a peak of US$70 per tonne.

Less surprisingly, this nearby tightness has attracted material into London Metal Exchange warehouses, with LME stocks ending 1,225 tonnes up on the week. However, cancelled warrants remain high at 10,475 tonnes, so further withdrawals are likely.

Clearly, the physical supply of zinc in Europe is tight, with premiums for prompt metal still at extremely high levels. On the other hand, zinc is one of the few LME metals for which there is strong evidence that off-warrant stocks have built up during the first half of the year, since declines in LME stocks are much higher than most estimates of the market balance.

Not too much should be read into the deterioration in 3-month prices at this stage. Most recent zinc market activity has centred on the cash price and further forward dates, and if this persists, we expect the 3-month quote to adjust higher over the days ahead.

Nickel prices were largely influenced by external factors during the report period and, as a result, edged away from the highs of the previous week. By Sept. 15, prices were struggling to maintain their recent ranges. Prices closed at their lowest levels for over a week on Sept. 15 at US$8,475 per tonne, just below the 10-day moving average. General weakness in the base metals complex had a negative influence on Sept. 15, as prices drifted lower in the afternoon, finding some support at US$8,500 per tonne.

LME stocks data painted an ambiguous picture, remaining flat for three consecutive days before registering a 54-tonne increase on Sept. 13, the first such rise in nickel stocks since Aug. 9. With cancelled-warrant data still at their lowest level in some time, the evidence would suggest that the decline in nickel stocks is bottoming out and that little potential for further withdrawals exists.

In the short term, nickel prices are perhaps more protected than the other base metals from any movements on the downside. As long as the strike continues at Falconbridge’s operations in Sudbury, Ont., nickel’s downside is limited. Moreover, as the prospect of force majeure being declared on deliveries by one of the world’s major producers of nickel looms closer, participants will be comfortable retaining long positions and increasingly reluctant to go short.

Gold prices were again dominated by foreign currency markets as the Australian dollar plummeted to fresh lows against the U.S. dollar. For much of the week, prices remained within their US$272-to-$274-per-oz. trading range, though, by the afternoon of Sept. 15, the US$272-per-oz. support level was coming under greater pressure as prices dipped to the US$270-per-oz. mark before recovering a little to recoup some losses and close in London at US$272.05 per oz. — the lowest closing price for about three weeks.

The current weakness of the Aussie dollar against the American greenback bodes ill for gold prices. With the price Down Under close to A$500 per oz., Australian producers may see an opportunity to sell at a time when market sensitivity to gold supply remains high.

— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.