Nickel continues steady recovery

Metals traded thinly during the report period July 3-7, partly reflecting the American Independence Day holiday. Aluminum, copper and zinc drifted toward the lower end of their recent narrow ranges, while nickel continued a steady recovery from its recent lows, supported by comments from union officials at Sudbury, Ont., that labour negotiations with Falconbridge may not deliver the expected settlement.

The metals market continues to watch U.S. data for clues regarding the future path of U.S. interest rates. Paradoxically, evidence of continued strength in the U.S. economy is damaging for metals prices at present because it increases the risk of a hard landing and much weaker metals demand farther down the road. Stronger-than-expected data pertaining to factory orders (up 4.1% in May, the largest increase since 1992) caused some jitters, which encouraged selling of both copper and aluminum. However, the scales were balanced later in the week when data showed U.S. payrolls growing by a lower-than-expected 11,000 jobs, pushing both stocks and treasuries higher on hopes that this would reduce the chance of further rate hikes.

In thin trading at the start of the report period, copper prices soon ran out of steam when resistance at US$1,800 per tonne was met. Despite failing to break through the US$1,800 level earlier in the week, speculative interest looked sufficient to provide support at US$1,780 per tonne. Narrow trading later in the period saw a selloff once prices broke through US$1,780 per tonne to close in London on July 7 at US$1,769.

During the first half of the year, combined Comex and London Metal Exchange (LME) copper stocks fell a massive 250,000 tonnes, matching some of the largest declines in recent history. Since the early 1980s, this level of stock fall has been bettered only twice — in 1984 and 1994, when the market registered Western World deficits of 492,000 and 366,000 tonnes, respectively.

So is the copper market heading for a similar-sized deficit this year? We think not. The fall in LME stocks probably reflects a significant buildup in off-warrant material, and demand should be weaker in the second half of the year as this inventory is worked off. Most of the off-warrant stock increase has occurred in China, where apparent consumption of cathode in the January-to-May period rose 27%, reflecting a 35% increase in net cathode imports. Assuming that real consumption is matching in-pipeline growth at 11% over the same period, then growth in demand is likely to be around 60,000 and the build-up of stocks in China could reach as high as 85,000 tonnes.

In addition, we believe that much of the 50,000-tonne fall in stocks from the New Orleans warehouse since early March is moving into off-warrant stocks to supply Southwire, the U.S. wire and cable manufacturer. Assuming Southwire needs approximately 10,000 tonnes of copper per month to fill the shortfall left by the closure of its 120,000-tonne-per-year Carrollton refinery in mid-July, it has already obtained almost all of its requirements for the second half of 2000.

Aluminum traded thinly during the first part of the report period but looked increasingly likely to fall below the 10-day moving average. The thin volumes meant that little could be drawn from the weakness, and, although prices on July 4 dipped to close down below the 10-day moving average, speculative interests remained. Unfounded rumours that financial difficulties at Kaiser may adversely affect output gave some upward momentum to prices, as did the July 5 LME declaration date, which brought some upside calls into play. Prices rallied to a high just short of US$1,600 per tonne, but, as with the base metals complex as a whole, prices failed to overcome upside resistance.

Aluminum demand has grown rapidly this year, climbing globally by around 5.5% year-on-year in the first half, thanks to strong demand for aluminum in flat-rolled products and extrusions. However, there are distinct signs that demand from both sectors has now peaked, confirming our long-held view that aluminum consumption growth will slow in the second half of 2000.

According to data from CRU International, demand for extrusions slowed to 5% in the second quarter from a growth rate of 8% in the first. Also, demand for flat-rolled products slowed to 1% in the second quarter, compared with 4% in the first. In flat-rolled products in particular, distributors are reported to be overstocked in both Europe and the U.S. Conditions for aluminum demand are expected to deteriorate in the U.S. as the construction sector slows in the second half of the year. For the time being, however, conditions remain good in Europe, where high stocks are a function of strong demand.

Nickel prices continued their climb, albeit at a slower pace than in the previous report period, to close on July 7 in London at US$8,170 per tonne. Quiet trading earlier in the week (again, reflection the U.S. holiday) dampened price activity, but July 5 saw a rally as options activity pushed prices up above the US$8,100-per-tonne level. Prices spent the rest of the week in a narrow range in thin trading. However, the fund driven selloff that pushed down aluminum and copper did not affect nickel prices on July 6 or 7 and they managed to retain earlier gains.

Falconbridge workers in Sudbury voted for a strike mandate by more than 97%. Workers now have the legal right to strike Aug. 1 if no new contract deal is struck. Union President Rolly Gauthier says he is not optimistic a deal will be reached.

Despite a shallow downturn in zinc prices, the market gave way to some fairly directionless trading. After closing the previous week at US$1,153 per tonne, prices closed in London on July 7 at US$1,140. Although prices fell to their low of the week on that day, it was July 6 that saw some repositioning by speculators, causing prices to fall to a low of US$1,133 per tonne. The decline in zinc prices toward the end of the week occurred during thin trading and provided little idea of the future direction of prices. On the upside, zinc has to overcome resistance at US$1,165 per tonne before it can break out of its current range-bound trading pattern.

LME stocks continued their fall, ending the week down 4,175 tonnes at 220,675 tonnes. Despite the current backgound of low stocks and zinc’s still-firm fundamentals, much Commodity Trading Advisor and fund interest will remain outside of the market pending a clearer indication of which direction zinc prices are likely to head in the near term.

Gold prices steadily ratcheted downwards to reach a close in London of US$283 per oz. after ending each day consecutively down. Every close of the report period came in at below the 10-day moving average, and, by July 6 and 7, the closes had dropped to below the 30-day moving average.

Prior to July 5 Bank of England gold auction, little activity was seen in the gold market. Sentiment following most of the recent auctions has deteriorated even though short-covering rallies created temporary spikes. With investor interest in gold still low, we expect the cover ratio to be low as well.

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