Rising inventories

Base metal and many minor metal inventories rose again during May and early June, reaching their highest levels in years. The reasons vary, but relate mostly to an ease in demand caused by declining manufacturing in the military and the need by mines and refineries to sell daily output to maintain cash flows.

Persistently low metal prices are forcing mining companies to trim costs as they wait out the period of slow demand. As is normal at this time in the cycle, many producers are operating on a cash basis and reporting ever-greater accounting losses. High-cost producers are beginning to shut down. However, only when cash losses become negative will the large mining concerns begin seriously cutting production. In the meantime, they lose less by maintaining high production levels and, as a result, inventories are on the rise.

As happened to aluminum, the doubling of Russian nickel exports to the West is distorting normal trade patterns. (Over a 2-year period, they rose to 140,000 from 70,000 tonnes, much of it at prices far less than the fair cost of Western production.) While the Russian producers and governments are forgoing much-needed revenues on such sales and slowly reducing output (as reinvestment is virtually impossible), Western producers of these metals may, if the trend continues, be in for a few more years of misery. In world steel manufacturing, rationalization by many companies is proving to be uneconomic. The effect is that work-in-process inventories is being reduced to minimum levels and world inventory requirements are being further lowered. On a positive note, low metal prices are allowing stainless steel usage and tonnage to grow to an estimated 11 million tonnes in 1993 from 10 million in 1990, substituting and finding new uses. This forecast growth, if it materializes, would sop up an estimated 56,000 tonnes of nickel per million tonnes of stainless manufactured.

However, at current rates, it is unlikely that inventories will decrease or prices increase until there is a serious drop in supply. It is more likely that there will be a few spectacular failures in the world mining industry. This will interrupt production long enough for more normal fundamentals to return.

Cobalt markets are weaker, with spot June prices easing. Western brands are at $14 per lb. ($14.50 per lb., this and all subsequent parenthetical figures referring to end-of-May values), Russian at $12 ($13) and producers officially at $18 ($18) but discounting where required.

Copper prices to date in June eased their sharp decline, recovering to US83 cents (81 cents) as inventories on the London Metal Exchange (LME) and the New York Commodity Exchange continued their rise, reaching 527,873 (519,278) tonnes. To date in June, nickel dropped to $2.57 ($2.61) as LME inventories rose slightly to 96,312 (95,274) tonnes. A rumor this week is that the quantity of nickel inventory in LME warehouses off-warrant (that is, not reported) is almost equal to that which is on-warrant (reported). If the rumor is true, these stocks and those held by producers would total about five months’ worth of consumption.

Molybdenum oxide is firming, but on low volumes. Prices are reported around $2.25 lb. ($2.15).

Meanwhile, lead markets are quiet. In spite of a growing number of shutdowns and dropping producton, cash LME prices eased slightly at US18 cents (18 cents) as stocks rose again to 259,550 (257,875) tonnes. At these price levels, even secondary suppliers are closing.

Zinc markets were also softer again, with cash prices off to US42 cents (44 cents) as stocks jumped again to 670,700 (660,175) tonnes.

Consolidating recent gains and digesting news of continued central bank selling, June gold prices to date remained ahead at US$373.60 ($341.95). Platinum continued its upward swing, ignoring a report forecasting a slight oversupply in 1993, with prices ahead to US$389.64 ($385.26). Palladium, also ahead, reached US$123.21 ($119.60) and rhodium eased to US$875 ($925).

Silver, like gold, appears to be consolidating recent gains at US$4.44 ($4.46).