Base metals continued to shed value during the report period Dec. 10-14 as the markets eased back following the technical rally of late November.
Nickel was the big loser, shedding 8.1% of its average cash price, followed by aluminum (minus 4.1%), copper (minus 3.7%), zinc (minus 3.2%) and lead (minus 2.1%).
December has been a difficult month for base metals, with an almost constant downtrend in all the major London Metal Exchange (LME) markets. Key technical levels appeared to be holding at the end of the report period, and the appetite for aggressive short selling is probably pretty low now that the holiday season is in full swing. We expect a period of uneventful trading in the immediate term.
Looking ahead, the prospects for a strong start to the new year are fading, as fund short positions are pared back and LME stocks continue to mount. One positive sign is the dramatic pace of decline in U.S. inventories. Wholesale inventories in October fell at their fastest pace since 1992, while business inventories registered their largest-ever fall, declining by 1.4% following from September’s 0.6% decline. The fact that lower auto inventories are one of the largest contributors to the overall downtrend takes some of the gloss off the data since recent high sales levels (boosted by zero-rate financing) are probably unsustainable. Nevertheless the data do support the view that when growth in the U.S. economy resumes, demand for metals containing products is likely to rise quickly, feeding through into much better order levels at metal producers and fabricators. Unfortunately, Europe and Asia are running somewhat behind the U.S., and it is likely to be several months before the destocking process nears completion in those economies. When it does, the market may be surprised at the strength of the recovery in demand.
After the previous week’s big losses, the copper price descent slowed somewhat as good support was found in the low US$1,460-per-tonne range. Copper has been hit less hard by LME stock increases than by aluminum over the past few weeks (39,000 additional tonnes since late November — an increase of 5% compared with aluminum’s 13%). However, combined LME and Comex stocks are now more than 1 million tonnes, and Shanghai stocks, at 69,000 tonnes, are 23,000 tonnes above their early-November low point. Further stock increases are likely in the short term, and although big price falls are judged unlikely now that funds are broadly neutral, upside potential is limited. We expect a price range of US$1,440-1,520 in the short term.
Mine production cuts are starting to feed into the market now, the evidence being recent announcements of decreased smelter output and November’s Escondida production data, which showed production on an annualized basis falling by 62,000 tonnes per year. These data would suggest that the 80,000-tonne-per-year production cut instituted in early November is already taking effect. But how quickly will cuts to mine output feed through to the metal market? Cuts at Japanese smelters account for the bulk of those made so far and may have more than a little to do with treatment and refining charge negotiations under way. Europe’s Norddeutsche Affinerie indicated the way many other smelters may be thinking when it announced it had no intention of cutting production since that would only serve to raise its unit costs.
Aluminum prices continued their descent, with the LME 3-month figure hitting US$1,325 per tonne on Dec.14, its lowest for almost a month. Sentiment was dented by further large increases in LME stocks and by the continued absence of any pick-up in consumer demand. Physical premiums have, if anything, fallen further from already-low levels. Given current reported stock levels, aluminum appears fairly valued at present. The chance of any improvement in market conditions before the onset of holidays is unlikely, and the trend for the remainder of the year looks likely to be sideways to downward in a range of US$1,300-1,350 per tonne.
Zinc ended the report period poorly, with the LME 3-month price closing at US$762 per tonne, just US$14 shy of its low, for the year, of US$748 per tonne. Prices now look set to drift gently downward to re-test recent lows, and a trading range of US$748-760 per tonne looks likely. Ultimately, the only factor that will stop prices falling even lower is further production cuts. The focus had been on Western Metals, which, per year, controls 170,000 tonnes of Australian mining capacity. The company has severe financial problems, though it recently gained a debt deferment and is negotiating a standstill agreement with debtors — an agreement that will enable it to maintain zinc production at least until February.
Falls in the nickel price to the lowest level since early November, together with a fall through the US$5,000-per-tonne level, indicate that fundamentals still remain weak. From a technical perspective, the support found at US$4,800 per tonne, even though the rest of the complex remained decidedly soft, confirms our suspicions that a squeeze is being attempted. Another week of significant falls in LME stock levels (down by 270 tonnes week over week), while cancelled warrants stay at around the 5000-tonne level, provides evidence that attempts to squeeze short funds are in place.
The result of this is seen in the degree of support at US$4,800 per tonne and in the ability of prices on Dec. 14 to reverse two days of losses and return to the US$5,000-tonne area. More importantly, the backwardation between the cash to 3-month price flared to more than US$100 per tonne earlier in the week and ended just below US$100 per tonne. There are some remaining signs of this possible squeeze (for example, steep backwardation, falling stocks and high cancelled warrants), though it wold be unwise to write off short-term prospects for nickel. Behind this caution, however, fundamental evidence suggests that any technical risks to the upside may be short-lived.
Russia’s Noril’sk Mining and Metallurgical Kombinat announced that 158,000 tonnes is its export target for nickel this year, compared with 177,000 tonnes in 2000. Applying our estimate of production at 220,000 tonnes per year, the average rate of Russian consumption of 23,000 tonnes annually implies a stock buildup in Russia of around 60,000 tonnes per year. Therefore, despite LME stock draws, data suggest that off-warrant stocks remain high.
After a lacklustre weak of narrow price movements in subdued trading conditions, gold prices finally responded to the firmer precious metals complex on Dec. 14. The belated move above US$278 per oz. was, in many ways, a response to events extraneous to the gold market itself. Severe tightening in silver’s lending market and the consequent break above US$4.40 per oz. in spot prices on Dec. 14 was the main source of support. Strength was also drawn from the stronger euro/greenback after massive falls in the value of the yen.
Comex speculative funds have amassed a net short position, and it isn’t surprising that short-covering pressure has pushed prices up to around US$278 per oz. The move is in line with our expectations that prices would be able to move in a broad US$272-to-278-per-oz. range ahead of the holiday period. The move was also in line with our view that, ahead of the year-end, an aggressive test of levels above US$278 per oz. would be unlikely as book squaring became the objective and neutrality became the main trading balance.
Soaring lease rates in the
liquid. Once lending increases, lease rates will weaken, and we expect to see prices quickly retracing the steps of the previous week. Once the U.S. dollar starts to reflect its fundamentals again, once silver prices weaken and once holders of speculative short positions have covered and squared their books, we expect gold prices to reflect an easing in trading conditions. Prices should end the year in the neutral US$272-to-280-per oz. range.
— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.
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