Nickel holds firm in soft markets

Base metals markets remained soft for the week ended Feb. 18. Aluminum, lead and tin continued to trend lower, while copper and zinc remained close to the bottom of their recent trading ranges. Nickel, still trading at 5-year highs, was the only bright spot. The overall weakness reflects the withdrawal of speculative money from metals markets.

The next few weeks will be crucial in determining prospects for the rest of the year. With the peak season for physical demand approaching, there is still little sign that consumers are entering the market in force. Spot premiums for metals are at reasonable but unexceptional levels. Apart from nickel, there is plenty of metal available to the market and so there is no need for consumers to chase prices higher.

One catalyst could be China, which was dormant during the recent new year’s celebrations. China was reported to be a major buyer of copper in the report period. With gross domestic product growth forecast to be in excess of 7% this year, significant buying of copper, aluminum and stainless steel is expected. If this buying trend emerges soon, it could be just the spur that the markets need to push higher.

After recent declines, copper prices found support as analysts at the Copper Club in New York enthused about the red metal’s prospects in 2000. They pointed to the strength of auto and construction markets and placed predicted copper prices this year of between US84 and US90 per lb. (US$1,850-$1,980 per tonne). The report period’s 6,000-tonne decline in London Metal Exchange (LME) copper stocks may also have helped bolster market sentiment.

The LME 3-month price fell to a low of US$1,820 per tonne in the middle of our report period. The decline from US$1,880 per tonne earlier in the week was blamed on sales by a major hedge fund. During the second half of the report period, a minor technical rally ensued, and this was attributed to buying in the Far East — not surprising, given that the Chinese are now back in the market following their New Year break. More significant, perhaps, is the strong trade buying that was seen on Feb. 17 and Feb. 18.

There are large uncovered option positions that mature in March, and, if the LME 3-month copper price makes a concerted break above US$1,880 per tonne, options-covering could drive prices up to test the highs for the year (so far) of US$1,945 per tonne. However, there are also significant stop-loss sell orders at around US$1,800 per tonne, which could be triggered if copper moves lower.

The fundamental direction for copper is also unclear. Better-than-expected U.S. housing data (a 1.5% rise in January, compared with market expectations of a small decline) suggest that demand in the short term should remain firm, and we still expect an upturn in copper prices to the US$2,000-to-$2,100-per-tonne region over the next few months as seasonal demand picks up. However, a slowdown in U.S. demand is not unlikely. U.S. Federal Reserve Board Chairman Alan Greenspan’s hints that “at some point” interest rates will be high enough to balance out U.S. supply and demand seem a clear indication of further rate rises to come. Sooner or later, this expectation is likely to reduce both potential demand growth for metals and also the enthusiasm of funds that have been the big buyers of copper so far this year.

The LME 3-month aluminum price fell to US$1,628 per tonne (its lowest level since early January) as the unwinding of the backwardation sparked mid-week fund sales. Aluminum’s technical indicators suggest a period of consolidation in recent ranges over the next week, though, as with copper, we still expect the year’s highs to be tested over the next few months. In the short term, prices could fall to below US$1,600 per tonne and still remain in the medium-term uptrend.

LME stocks climbed a further 16,450 tonnes during our report period, taking LME stocks to their highest level since March 1997, when prices, at around US$1,610 per tonne, were slightly below current levels.

Aluminum bulls point to the fact that the stock increase over the past few weeks is considerably less than it was during the same period in 1999, suggesting that the market is fundamentally tighter now. However, the squeeze on that occasion involved a physical merchant with large stocks in locations close to LME warehouses. It is fund shorts without easy access to metal that have been caught in the squeeze this time around, so it is perhaps not surprising that less metal has been delivered over recent weeks.

Since its peak of US$1,754 per tonne just over a month ago, aluminum prices have weakened considerably in comparison with copper and nickel. Aluminum premiums in most consuming regions are steady, reflecting healthy demand, but, at present, there is ample metal available both in LME warehouses and off-warrant to satisfy demand.

Another reason for the easier tone in aluminum is that concerns over alumina have lessened. There have been no reports of producers having to cut output because of lack of feed. Several alumina-producers have announced increases in production. In China (thought to be the region most vulnerable to alumina shortages), several primary producers have announced production increases.

At the same time, concerns about possible production problems in Russia appear also to have eased, though the situation remains volatile. The trend toward consolidation in the Russian aluminum sector continued when it was reported that Russian financier Boris Berezovsky is in the process of acquiring, through Russian companies Sibneft and Logovaz, major stakes in the Achinsk Alumina Combine, the Bratsk, Novokuznetsk and Krasnoyarsk aluminum smelters, and the Krasnoyarsk power station. This could do much to calm a volatile and complicated ownership structure, as well as ease fears of interruptions to Russian aluminum shipments to the West. In the short term, it may enable shipments to resume from the Novokuznetsk smelter, where around 19,000 tonnes of metal have accumulated since a local court placed a halt on shipments three weeks ago.

Despite looking vulnerable from a technical perspective (after the previous report period’s sharp upward move), nickel confounded our own expectations for a period of consolidation at lower levels. It appears as if positive fundamentals are preventing even technical selling. Although the upward momentum has slowed, the LME 3-month price continues to inch closer toward the psychologically important US$10,000-per-tonne level — it just failed to make it on Feb. 18, peaking at US$9,990 per tonne and finally closing at US$9,890.

Volumes during the report period were thin, and the market remains extremely nervous because of fears of a strike at Inco’s Sudbury operations, where the labour contract runs out on May 31. The market was not even eased by news that Eramet may be close to reaching an agreement with unions. Emphasizing the tight state of physical supply, the decline in LME stocks accelerated, falling 1,950 tonnes in comparison with the previous two weeks’ declines of around 750 tonnes.

Data from the International Nickel Study Group show that the growth rate in nickel consumption eased in the final two months of 1999 but remained strong, averaging around 7%, compared with 12% in October. However, with stainless steel consumption growing strongly so far this year (CRU International estimates year-on-year growth of 9% in the first quarter) nickel demand has almost certainly accelerated once again.

After the gains made in the previous report period, zinc lost virtually all of its momentum in the space of two days before hitting a new low of US$1,096 per tonne. Prices managed to stage a convincing recovery throughout the second half of the report period, trading in narrow ranges before reaching a Feb. 18 close of US$1,118 per tonne.

The market was given a boost by news that China’s Qinzhou Guangxi trading corporation had halted zinc ingot exports in mid-February owing to current low prices. On Feb. 18, a company official claimed exports would not resume until prices had returned to at least US$1,180 per tonne. Most of the corporation’s exports end up in Singapore, South Korea and other Asian countries, with 70% of its 10,000-tonne export target coming from its own plant in Guangxi and the remainder coming from other Chinese plants.

Zinc’s fundamentals continue to present a positive outlook. Stocks, currently at 287,475 tonnes, are already at low levels and continue to fall, declining by 1,325 tonnes in the report period. With zinc ending 1999 at close to market balance, nervousness over stock levels should soon bolster prices and return trading ranges to the levels seen prior to the recent heavy losses. To signal the start of a new uptrend, zinc prices need to break above US$1,134 per tonne, the level that has provided resistance for most of February.

News that Outokumpu intends to reach capacity at its Tara mine in Ireland placed no downward pressure on prices, supporting the view that there is a constraint on smelter production at present.

A fairly volatile few days saw gold move down from the spikes reached following recent announcements of hedging scale-backs by producers. After opening on Feb. 14 at US$310 per oz., prices trended steadily downwards toward the middle of the report period. The US$300-per-oz. mark provided little resistance as prices on Feb. 16 and Feb. 17 dipped to hit lows for the day of US$296 and US$296.8 per oz., respectively.

By Feb. 18, the market’s attention shifted away from the producer hedging issues that had previously forged prices and toward the prospect of producer buybacks. The market remained nervous for the remainder of the report period as unsubstantiated rumours continued to lift prices and provide support just above US$300 per oz.