Nickel stocks fall as price continues to climb

The report period Aug. 21-25 was a lethargic one, characterized by rangebound trading for base metals markets.

Nickel was the only major market in which trading showed any clear sign of direction. The LME 3-month price continued to climb, supported by tight nearby spreads, fears of a prolonged strike at Falconbridge’s operations in Sudbury, Ont., and speculation that exports from Russia’s Noril’sk could tail off in the second half of the year. The only other notable feature were LME stock increases in copper (up 2,975 tonnes on the week) and zinc (up 6,425 tonnes). Stocks of nickel and aluminum continued to fall.

Despite low volumes on the London Metal Exchange (LME), sentiment surrounding the major base metals continued to improve in anticipation of a soft landing for the U.S. economy. The sharp fall in orders for U.S. durable goods orders helped reassure financial markets that the American economy is slowing in the way that the Federal Reserve Board intended. There are signs, however, that demand for metals is slowing more than demand for other U.S. commodities. For example, U.S. aluminum product orders fell 17.6% in July, the largest decline of its kind in a long time. Meanwhile, a major U.S. producer of fabricated products is laying off 15% of its workforce, owing to weak order levels for the second half of the year. Also worrisome is a recent slowdown in Japanese brass production, following several months of impressive gains. If these trends intensify, the prospects for metals prices could come to rest heavily on the continued health of the European economy over the remainder of this year.

Copper prices recovered steadily after falling sharply to the bottom of the recent range of US$1,860-1,890 per tonne for the LME 3-month price on Aug. 21. The fall came after funds liquidated long positions, following a 1,675-tonne increase in LME stocks, the first rise since April.

For the report period as a whole, LME stocks climbed 2,975 tonnes — a small amount in the overall context of the 389,975-tonne fall in LME stocks since March 8 and the 100,275-tonne fall during the July-August period (when stocks normally rise). The bulk of the deliveries went to the New Orleans warehouse, prompting speculation that the material is, in fact, previously accumulated off-warrant material that is now being delivered back. Declines in New Orleans inventory early this year are widely believed to be related to the building of consignment stock following the closure of Southwire Co.’s refinery in Carrollton, Ga.

If so, U.S. copper demand over the remainder of the year may prove to be less robust than expected. A sharp fall in July U.S. durable goods orders was taken as a positive sign by the financial markets that the U.S. economy is heading for a soft landing, but it also suggests that copper-intensive sectors of the American economy are about to suffer disproportionately from an economic slowdown. Transport, electrical and electronics sectors, which together account for around 35% of U.S. copper demand, contributed substantially to the decline in durable goods orders. The housing sector, which accounts for 40% of copper demand, is also slowing more rapidly than expected.

Aluminum prices continue to trade in an extremely narrow range despite falling LME stocks and continued speculation about the security of power supplies to U.S. smelters. Euro weakness is still keeping European consumers sidelined, while uncertainty over the state of the U.S. economy is serving to dampen speculative interest. Without a clear resolution of these factors, prices look likely to remain in their recent narrow range, and the large volume of September call options that have been overhanging the market between US$1,650-1,700 per tonne are set to expire without incident.

The International Primary Aluminium Institute reports that power-related cutbacks in the U.S. are having a considerable impact on primary production. Global production growth has slowed to just 1.8% (its slowest rate since December 1998), as North American output registered a 5% decline year-on-year.

A sharp rise in nickel prices on Tuesday, Aug. 22, was supported by follow-through buying. Prices closed on Aug. 25 at US$8,365 per tonne, for a gain of US$525 on the week. Although prices have been on a steadily upward trend since dipping below the US$7,500-per-tonne support level in early August, this latest rally occurred following the announcement that LME stocks had fallen by almost 1,000 tonnes.

The rally easily broke resistance at US$8,000 per tonne, with follow-through technical and fund buying adding momentum to the upside on Aug. 23 to give LME prices their highest close since early June. Activity among Commodity Trading Advisors was noticeable, as higher prices prompted short covering by speculative participants. Their presence at this time suggests that the ongoing strike at Falconbridge is attracting speculative interest to the nickel market, and, with no signs of an imminent solution, prices could continue to reflect market jitters. However, with speculative positions being taken out in response to the strike, nickel could again find itself exposed to a rapid selloff once a deal is reached between Falconbridge and the union.

With the Sudbury strike now in its fifth week and force majeure on its copper deliveries having been extended to late September, there is little light at the end of the tunnel. Talks were set to resume prior to presstime.

With nickel stocks currently at their lowest since the start of 1992 and heading below 10,000 tonnes for the first time since late 1991, market sensitivities over physical tightness remain finely tuned despite forecasts of higher production and waning demand. Noril’sk has hinted that it may export less material during the second half of the year than it did in the first, though this has not been confirmed.

There are signs that tightness in supply is beginning to ease, and nickel production is forecast to rise considerably. The International Nickel Study Group reported a deficit of 18,300 tonnes for the first half of 2000, which is considerably less than the 33,400-tonne deficit reported for the second half of 1999. This slackening in the market balance is indicative of nickel’s future situation as it gradually moves into surplus. In the short term, however, with falling stocks and a producer of 5% of the world’s nickel strike-bound, speculative interest will continue to provide upward momentum.

Zinc prices ended the report period at the bottom end of their range, closing on Aug. 25 at US$1,177 per tonne. The close was below the 10-day moving average and leaves zinc prices struggling to maintain current ranges and remain above the US$1,180-per-tonne level of support. Some are still forecasting US$1,200 per tonne, but prices face heavy resistance on the upside from producer forward-selling, which has placed a cap on prices in the range of US$1,180-1,190 per tonne.

The recent increase in LME stock levels has depressed sentiment further, just when prices were edging close to the US$1,200-per-tonne level. Stocks moved sharply upwards during the report period, ending up at 6,425 tonnes, with the largest single increase taking place on Aug. 25, when a stock rise of 3,825 tonnes was registered. The rise in stocks should come as no surprise; what is surprising is that stocks have not risen before now, given the quiet summer season and traditionally low demand for physical material. There is still a good chance that greater demand to hit the zinc market after the quiet summer season, at which point we could see greater stock withdrawals and a spike in prices.

Evidence of greater supply was offered by the International Lead and Zinc Study Group, which reported that output of Western zinc metal rose 5.9% year-on-year during the first half of 2000, whereas, during the same period, zinc metal consumption grew by just 1.6%. Australia has seen a 40% increase in its zinc output since the opening of Sun Metal’s refinery in Queensland. The data also showed a 26.3% year-on-year increase in the level of Chinese exports, which reached 269,000 tonnes.

US$270 per oz. proved to be an effective level of support for gold prices, as the strength of the U.S. dollar continued to put downward pressure on prices. Following the previous report period’s brief rally to levels just above US$275 per oz., prices trended downwards and looked poised to provide a serious attempt at breaking support to test the territory below US$270 per oz.

However, once prices hit US$270, they managed to rebound well and moved above US$272 per oz. again, to close higher at US$272.70. By Aug. 25, some short-covering began to push prices up towards US$275 per oz. once again before the move ran out of steam. Prices closed in London on that date at US$274 per oz., making up the losses incurred during the previous two days of trading.

Still, it would be difficult to find evidence for the argument that gold will continue to remain in the range of US$272-275 per oz. Indeed, further tests of the downside look likely.

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