The report period March 12-16 was a poor one for base metals as turmoil in international equities markets spilled over into sharp price falls across the whole of the complex. Aluminum was hardest-hit, with the weekly average London Metal Exchange cash price shedding 3.4% and the LME 3-month price dipping below US$1,500 per tonne for the first time since December 2000, thanks to large-scale fund liquidation on March 16. Copper was the next-poorest performer (-2.6%), and although zinc and nickel also lost value (-2.3% and -2.1%, respectively), both proved fairly resilient in the face of heavy selling elsewhere.
The downtrend in copper prices established in early March continued, as the LME 3-month price shed almost US$60 per tonne, hitting a low of US$1,750 on March 16. The market continues to be dominated by small, trend-following funds, with occasional larger volumes coming in from merchants. Producers and consumers are conspicuous by their continued absence. This should be the busiest time of year for the physical market, but instead it is quiet. Premiums have shown some signs of an upturn recently, yet LME stocks are static at well above their levels of earlier this year, and cancelled warrants are trending down. The state of affairs suggests either that the market is in surplus or that off-warrant stock is ample to supply modest demand levels.
U.S. housing starts held steady in February, maintaining the impressive start to the year, and the high level of building permits suggests that these levels will persist for at least the next few months. U.S. industrial production figures were less positive. February data came in below expectations, at 0.6% (month-over-month), but it may be that the worst is over, considering that auto production is stabilizing and that some significant increases have been announced for the second quarter.
The recent collapse in stock markets, led by the Dow Jones industrial index and the Nasdaq, is, to put it mildly, a worrying sign for
After crashing through support at US$1,530-1,540 per tonne early on, momentum for
The recent large increase in unwrought producer stocks for January has added to concerns about the health of market fundamentals and almost certainly contributed to the poor price performance.
In tonnage terms, the largest increase was in North America: +34,000 tonnes, compared with the end of December. This has raised concerns that the big cuts in production recently enacted there are being offset by a slowdown in demand in the U.S. so that the positive fundamental impact of the production cuts is being neutralized.
In percentage terms, the North American increase was the second-smallest on a regional basis, at only 6% (month-over-month). Europe, where stocks rose by 1.7%, experienced the smallest increase. In addition, North American stocks remain well below year-ago levels (600 tonnes versus 631 tonnes), and, what’s more, the continent’s aluminum market has yet to feel the full impact of all the plus-1-million tonnes of annual production cuts. The reason is that several cutbacks have been announced since January, most notably the complete closure of the 204,000-tonne-per-year Longview smelter.
We assume North American primary production will fall by 500,000 tonnes this year to 5.6 million tonnes (closures being offset by some increases, notably Alcan Aluminium’s Alma smelter in Quebec). Last year, North America was in deficit, between its own production and consumption of primary aluminum, by 1.2 million tonnes. In order for this shortfall not to increase (that is, for North America not to have to import any more aluminum than it did last year and to leave stocks unchanged), demand would have to fall by 7% in 2001. We assume a fall in North American demand this year of 3.5%, meaning that more metal will have to be imported if stocks are not to fall later in the year.
Given the resilience of nickel prices during the year to date, it would be surprising if they experienced a sudden collapse. So far, prices have been exposed to a serious weakening in the base metals complex as a whole, battered by a steady series of data showing a deterioration in underlying market fundamentals and one of the most economically bearish periods in years. A number of high-profile bankruptcies of steel companies in the U.S. and the recent end of the long-running Falconbridge strike in Sudbury, Ont., served to highlight the weakness of the supply-and-demand situation.
Nevertheless, LME stocks continue to decline. More than 400 tonnes came off warehouse stocks, pushing total inventories to below 9,000 tonnes once again. However, this news failed to prevent further price falls in the period under review. The nickel market appears comfortable with current stock levels, despite the low level of inventory on the LME, and we believe this illustrates both the weakness of demand at present and the availability of ample levels of off-warrant material.
Weakness in the rest of the base metals complex probably also played its part in nickel’s price fall, though, for some weeks now, nickel prices have been immune to movements in the rest of the base metals complex.
Data from the International Nickel Study Group (INSG) brought further bearish news. The figures provided evidence of how nickel supply growth is outpacing nickel demand. With pressure-acid-leach projects gradually raising their output this year, and with contributions to supply from other sources (such as the expansion in ferro-nickel output at Billiton’s Cerro Matoso mine, in Colombia, and the resumption of full production at Falconbridge’s Sudbury operations), we expect this trend to continue.
China’s zinc production is still increasing strongly. Output in February rose 13%, compared with year-ago levels, and was up 12% for the January-to-February period. China’s zinc exports in January were down 46% from a year ago, but the increase in production, supported by smelter expansions toward the end of last year, suggests that exports will likely rebound over the remainder of the first and second quarters. Overall, we still expect them to be close to last year’s record levels, at around 580,000 tonnes.
The zinc market failed to react to news that Metaleurop will close, for six weeks, its 110,000-tonne-per-year Noyelles-Godault smelter, in the Nord Pas de Calais region of France. The shut-down will take effect in mid-April. Although lead production of 165,000 tonnes per year will be halted for the whole six weeks, zinc production will actually be interrupted for only three weeks.
Not long ago, turmoil in the U.S. and London stock markets would have been accompanied by a rally in the price of
A lot can change in the space of a week, and the current sentiment in the bullion markets is sharply different to the mood of nervous optimism that existed just seven days ago. We were constantly suspicious of the newfound confidence in gold prices and never believed that a turning point had been reached. It is not possible, as events over recent weeks have proved, to build a sustainable and convincing rally from a short-term spike in front-end lease rates. Nor is it possible to depend on a large-fund short position on the Comex. Just four weeks ago, the largest net speculative short position since July 1999 was registered, but even this proved insufficient to boost prices significantly.
Clearly, the combination of the two was able to push prices higher earlier in the week. Once again a liquidity squeeze acted as the catalyst of the rally, pushing 1-month lease rates higher to a peak of around 6% and resulting in a tight borrowing market. The size of the net fund short position intensified the squeeze as positions were covered. A daily reduction in levels of open interest on the Comex showed that it was short covering that was fuelling the rally — an indication that there was no fresh buying coming in to provide follow-through momentum to prices.
As a result, once this bout of fevered but ultimately fickle trading had been concluded, there was nothing to prevent prices from drifting lower once again.
Why we are seeing liquidity squeezed in this way is still some matter of opinion and debate. The most likely explanation is one of disproportionate panic after some bullion banks restricted a portion of their usual lending activity.
The weakness of the Australian dollar continues to give rise to speculation that Aussie producers are locking in the higher local-currency gold price by increasing their hedge books. Our view is that, for the time being, this activity is at fairly low levels, but with the Australian dollar recently reaching a high of US$543 per oz., hedging activity in that country could soon increase.
The end of the rally was met, of course, by one of the Bank of England’s regular 25-tonne auctions. The timing could not have been more unfortunate since it hit the market precisely at a time when short positions had been covered and with few market participants keen to make fresh purchases. The auction result was a poor one, with a low cover ratio and the second-largest gap between the morning fix and allotment price, and its impact was still being felt by the market on March 16. A fourth consecutive day of price falls and a poor close below US$260 per oz. do not augur well for the short term.
— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.
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