Mixed opening for 2002

Base metals enjoyed a mixed opening to the new year (report period Jan. 2-4). Two of the less-fashionable metals, lead and zinc, saw sizable mid-week rallies and closed strongly on Jan. 4. In contrast, copper and aluminum both tested the downside early on but had strengthened by the weekend. With many market participants not expected back until Monday, Jan.7, trading volumes were thin and not too much should be read into the moves of the period under review.

One positive factor was the better-than-expected business sentiment indicators from the U.S. and the eurozone. The U.S. National Association of Purchasing Management index achieved it highest reading in more than a year, and the new-orders component jumped to its highest level since April 2000. However, while the eurozone Purchasing Managers’ Index climbed above its historic low in October 2001, the reading of 44.1 is still signalling recession until at least the end of the first quarter of the current year. These indicators may suggest that there are better times around the corner for base metals markets, but for the time being, seasonal factors are likely to cloud the outlook. Base metals demand traditionally gets off to a slow start in the first quarter, as one of its major consumers, the construction sector, slows down because of cold weather. In addition, as China approaches its lunar new year holidays in February, buying interest tends to drop off. Hence, there is likely to be little sign of improvement in the physical market for some time, suggesting a period of range-trading in base metals prices for the next few months.

Copper prices greeted the new year in fragile fashion, with support for the London Metal Exchange 3-month price in the low US$1,460s, finally breaking down as prices dipped to a 7-week low of US$1,434 per tonne. By Jan. 4, a recovery to just above US$1,470 per tonne had been achieved, but prices still remain vulnerable to short-covering by technical trading funds. Following a 100,000-tonne increase in exchange stocks during December 2001, the market will be watching to see if the influx resumes.

LME 3-month prices for aluminum also started the year on the back foot, falling to the bottom of their pre-Christmas range of US$1,328 per tonne. Looking farther ahead, tightness continues to be evident in the March-to-May spread, currently trading at substantially below full finance of around US$18 per tonne. As with copper, movements in LME stocks are likely to be a key determinant of market sentiment in the early part of 2002.

Nickel prices continue to buck the general trend in base metals. The LME 3-month figure edged up over the course of the week to close at US$5,735 per tonne, its highest level since mid-November. However, the emergence of substantial selling interest on the way up suggests that higher prices may not be sustained for long. Nearby material remains tight, supporting a widening in the cash-to-3-month backwardation to more than US$200 per tonne, and Norilsk’s announcement that it will not export nickel in January (and possibly February) is likely to result in further tightness.

Zinc rallied dramatically, with the LME 3-month price hitting a 7-week high of US$835 per tonne on Jan. 4, up almost US$50 per tonne from its level at the beginning of the year. Given zinc’s poor fundamentals, the move was a surprise and is best explained by broker and commodity-trading-advisor short-covering after rumours hit the market concerning production problems at Canada’s 250,000-tonne-per-year Brunswick mine. We expect prices to fall back quite swiftly, with initial support likely at US$800 per tonne. After recent mine cutbacks, the concentrates market is better balanced. Zinc smelter cutbacks are now required.

Gold prices remain stuck in their recent narrow US$277-to-281-per-oz. range, hemmed in by fund selling on the highs and physical buying on the lows. Overall volumes remain poor, however, and the focus of the precious metals market is on silver, where tight nearby lease rates have underpinned a price rally to US$4.70 per oz., its highest since February of 2001. The tightness in the nearby silver market that has pushed the forward into steep backwardation (1-month trading on Jan. 4 at negative 15%) is difficult to justify from a fundamental perspective. It is almost certainly the result of a technical squeeze engineered by one major player. The safety valve in such a situation should be the shipment of metal to the market. However, the differential between London and Comex prices is not yet wide enough to encourage this, and hence the tightness could persist for some time yet.

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