Positive sentiments return to zinc

The report period Oct. 30-Nov. 3 was an encouraging one for base metals markets, with signs of stability returning after recent large losses. Although copper, aluminum and tin registered further small declines in weekly average prices (-1.1%, -0.4% and -0.3%, respectively), zinc, lead and nickel were all gainers. Technically, most markets are looking healthier and appear set for a test of upside resistance. The one exception could be copper, in which a move to the low US$1,800-per-tonne level may be required to flush out the last of the stale longs.

One reason for a healthier tone to the markets is the stronger euro, which, at presstime, was trading at close to 4-week highs following the European Central Bank’s intervention on Nov. 3. The weak euro has been a depressing factor in recent weeks insofar as it has kept metals prices high for European buyers. The chances of a resurgence in European buying over the next few weeks are good if the euro can hold on to its gains. Underlying consumption levels remain firm in Europe, though activity has been depressed in recent months by de-stocking. If this process is now over, buying may be about to pick up again (particularly in copper and aluminum), and this may help offset some of the softness now apparent in U.S. demand. However, the weakness of the steel sector in Europe suggests that prospects for nickel and zinc may not be so good.

Copper prices showed signs of bottoming out following the price slide that has knocked almost US$200 per tonne off the London Metal Exchange (LME) 3-month quote since mid-September. Support during the report period held at the US$1,820-per-tonne level, thanks to several factors, including an easier tone to the oil market, further LME stock falls, and the start of a port strike in Chile that could affect copper metal and concentrates shipments. There is still a risk that a dip to US$1,800 per tonne is required to flush out some remaining stale long positions. However, with many funds and several dealers now short, a move higher could be supported by short-covering. If the 10-day moving average of US$1,852 per tonne can be overcome, the next level of resistance would be US$1,880 per tonne.

LME stock withdrawals are showing little sign of slowing, as copper inventories continue to dwindle. LME stocks fell 3,900 tonnes during the report period, despite more deliveries into New Orleans (+3,750 tonnes). Hamburg remains the main area of withdrawal (-3,725 tonnes), with smaller declines at other European warehouses, most of which we believe are going directly into consumption. The second week of large declines in Shanghai Exchange stocks (-6,200 tonnes) brought the total copper exchange stock decline to almost 10,000 tonnes.

The outlook for copper demand is still positive. In the U.S., a steeper-than-expected decline in the October index of the National Association of Purchasing Management suggests that copper demand from sectors such as domestic appliances may be weakening. On the other hand, manufacturing is a relatively small consumer of copper. Construction, with a roughly 35% share, is far more important, so the 2.4% increase in U.S. construction spending in September (the largest gain since November 1999) is a positive sign.

In Japan, wire and cable orders and shipments continue to grow strongly. The recently reported 6.7% year-on-year increase in orders is particularly encouraging in terms of demand. In Europe, CRU International reports that de-stocking of wire and cable products has been occurring, following overbuying in the first half of the year but that October saw demand returning to normal levels.

Aluminum prices have picked up noticeably, breaking above first the 10-day moving average at US$1,487 per tonne and then the psychological US$1,500-per-tonne level. The European Central Bank’s unilateral intervention to support the euro stimulated some long-dormant European consumer buying, which, in turn, pushed prices to a 9-day high of US$1,515 per tonne before trade selling capped the rise. The LME 3-month quote closed at US$1,494 per tonne.

Where does aluminum stand after this mini-rally? Sentiment is still fairly poor, mainly because of the ongoing slowdown in U.S. demand and concerns that off-warrant stocks are high. Moreover the year-end, when consumers traditionally like to keep inventory levels low, is approaching, and so a stronger euro is unlikely to result in concerted buying by European consumers.

However, European demand prospects are still good. CRU International reports that underlying consumption levels in Europe are solid, even though de-stocking has depressed order levels in recent weeks. And although European demand may appear weak year-on-year, the final quarter of 1999 was boosted massively by re-stocking, so the comparison is a little unfair. A healthy rate of growth in European demand is still expected next year.

Nickel prices continued to trend higher despite mounting evidence of weak consumption. The LME 3-month price trended steadily higher, closing on Nov. 3 at US$7,195 per tonne — practically its highest level since early October. Although the cash-to-3-month backwardation has contracted from its recent highs of almost US$500 per tonne, it is still wide and holding firm at around US$300 per tonne.

Despite the continued tightness in nearby spreads, LME stocks fell 210 tonnes during the report period — which is a little puzzling, considering the increasingly apparent weakness in the stainless steel sector.

Avesta Sheffield announced a cut in stainless steel production at its plant in Sheffield, Que., owing to the “temporary stock realignment” currently taking place in the stainless steel market. Avesta did not say by how much it plans to cut production, though it has reportedly told some of its scrap suppliers that it will require 50% less furnace feed over the coming weeks.

Meanwhile, Asian stainless steel prices continue to fall. Weakness is especially evident in the Taiwanese market, where prices for delivery to China have fallen by US$100 in less than a month; they now stand at US$1,350-1,400 per tonne for grade 304 cold rolled.

Supply, on the other hand, continues to rise, and there are signs that Australian pressure-acid-leach projects are gradually producing at more consistent levels. Centaur Mining recently announced that its Cawse project produced 1,855 tonnes nickel and 256 tonnes cobalt in the third quarter, operating at almost 90% of capacity. The company noted, however, that a significant capital expenditure was required to transform the project into the low-cost operation it was intended to be. Meanwhile, Preston Resources’ Bulong project achieved record output of 685 tonnes nickel and 46 tonnes cobalt in October, whereas Anaconda’s Murrin Murrin mine reported quarterly output of 4,118 tonnes nickel.

Of all the LME metals, zinc put in the strongest performance during the report period, as prices recovered firmly from the 15-month lows of the previous week. Prices overcame resistance at the US$1,070-per-tonne level early in the week and, in consecutively higher closes each day, finally moved convincingly above the 10-day moving average on Nov. 1 for the first time since late August/early September. Unlike copper and aluminum, zinc prices maintained their gains to end the week on Nov. 3 at US$1,084 per tonne.

Further LME stock falls of 4,500 tonnes took zinc inventories back to mid-September levels of 215,350 tonnes. The resumption of falling stocks and the breakthrough resistance at US$1,070 per tonne have restored some positive sentiment to the zinc market. However, despite the encouraging rebound, we do not expect much beyond a mild recovery in prices. That being said, the heavy liquidation that hit the market in October shook out most of the stale long positions, and so the downside (for the time being at least) appears limited.

From zinc’s fundamental perspective, mixed signs continue to emerge. Construction orders received by Japan’s 50 largest contractors fell by 9.8% year-on-year in September, raising concerns about the future
of galvanized steel consumption by the Japanese construction sector. On the supply side, a lack of concern over the increasing probability of strike action at Outokumpu’s 160,000-tonne-per-year Tara zinc mine in Ireland indicates the ease with which the zinc market currently views supply-side factors. Even if the Tara mine does go on strike, with Pasminco’s giant Century zinc mine operating at 80% capacity and scheduled to hit full capacity before the end of 2001, there is not likely to be any interruption to the production of zinc metal.

Despite a weaker U.S. dollar, gold prices remained capped on the upside at US$266 per oz. and trapped in a trading range of US$263-266 per oz. The euro reached its highest levels since the first few days of October and the Australian dollar continued its recovery, yet prices remained stagnant. After recovering only mildly from its lows at the start of the report period, gold closed in London on Nov. 3 at US$264.3 per oz.

Since the early part of this year, low gold prices have been attributed to the weakening of the major currencies against the U.S. dollar. The test for gold prices was therefore whether the U.S. dollar’s losses would turn into gains for gold and push prices back up towards US$270 per oz., where they had been comfortably supported throughout the Northern Hemisphere summer. Upward moves were frustrated from the start, however, and despite the falls in the U.S. dollar.

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