Severe winter takes toll on metals

Some first-quarter forecasters will be disappointed, particularly in the U.S. and parts of Europe. Severe winter weather across the Northern Hemisphere has slowed output and consumption of many products, including metals.

Related electrical cutbacks are curbing steel operations and difficult navigational conditions are stalling distribution of many bulk supplies to heavy industries. Of even greater concern is the fact that the low temperatures and treacherous winds have kept consumers under cover and out of the shops.

Except for zinc, output of many metals is slowly declining. Low prices, quota and tariff appeals and generally poor markets have begun to affect even non-market economies such as China and the Commonwealth of Independent States. In Asian markets, the business sector’s demand for metals is set to resume, now that the Chinese New Year holiday has ended.

In aluminum markets, prices perked as more producers announced cutbacks. The question remains as to whether the Russian producers, desperate for cash, will complete their shut-in commitments. Sharp price increases may motivate them to maintain output levels.

In most member nations of the Organization for Economic Co-operation and Development, metals fabricators are pressing hard to reverse losses and recognize higher scrap costs by instituting price changes. Weather permitting, U.S. steel companies, operating at plus-90% capacity, have announced increases of 3-5%. Similar European adjustments are pending. In the U.S., the central bank has signaled concern by suddenly raising interest rates, with higher adjustments anticipated. Cooling off the U.S. economy will certainly affect major trading partners who, with little inflation and high unemployment, may be reluctant to raise their own rates. The likelihood that investors will be seeking the higher U.S. interest rates may bring currency vulnerabilities to the forefront. As is illustrated by the fact that, last year, Germany’s rates were higher than those of its European trading partners, investors usually move to protect their assets. Prices on the London Metal Exchange (LME) in February were beset by slowly rising inventories. The following are average prices for the month, with January’s figures shown in parentheses.

The return to full production at Inco’s Sudbury and Thompson operations is putting downward pressure on nickel. However, good physical demand in Europe and the U.S. and a rumored squeeze developing in March helped keep prices steady. Nickel rose to US$2.64 (US$2.53) per lb. as LME inventories bounced up to 132,210 (128,826) tonnes.

Cobalt consumers continue to limit purchases to bare necessities, which is having the effect of holding prices steady. Western brands were recorded at US$21 (US$23) per lb., with Russian counterparts at US$17-18 (US$19). Betting on looming shortages, traders are still the volume buyers.

In lead markets, a slight drop in order backlogs caused the North American producer premium to decline to US5 cents from US8 cents per lb. Countering this, good support by cold weather-related battery sales held prices steady at US22 cents (US22.2 cents), as stocks increased again, to 330,775 (321,150) tonnes.

Meanwhile, zinc stocks surged again, to 1.1 million (998,325) tonnes, and prices remained virtually unchanged at US44 cents (US45.2 cents) per lb. Similar to the Metallgesellschaft losses of US$1.2 billion attributed to oil speculation, Codelco, the Chilean copper parastatal, has announced huge speculation losses. Admissions to date show the amounts ranging from at least US$210 million (US$164 million for copper and US$46 million for silver) to perhaps as high as US$300 million.

When the market looks set to fall, a producer may sell forward and then deliver physical metal against these contracts. Once delivered, the forward sale is complete. The net purchase of long contracts by a producer is usually unnecessary and can be attributed to speculation or price support operations. According to press reports, some of the problematic amounts are still outstanding. If one assumes the Codelco losses averaged US10 cents per lb. over the year, the tonnage amounts to 743,892, or about 67% of annual output. If the problem arose over the drop in copper price to US78 cents from US$1 in the second quarter in 1993, then the quantity, calculated at US22 cents per lb., is 338,133 tonnes, or 31% of production. Either way, it’s a large speculative position.

Continuing to show healthy signs, copper prices reached US84.7 cents (US81.9 cents) per lb., as the combined inventories on the LME and the Commodity Exchange of New York declined again, to 605,697 (653,314) tonnes. — Jack Dupuis is a metals agent, broker and consultant specializing in the marketing of mining properties.