Copper, nickel show life signs while gold remains in doldrums

The report period April 24-28 was an encouraging one for the main stars of the London Metal Exchange (LME).

Despite more wobbles in both equity and bond markets, copper and nickel climbed away from recent lows whilst zinc prices held on to most of their recent gains. Aluminum was an exception to the firmer trend, as was lead, which hit a 6-year price low. Recent bouts of financial market volatility have tended to result quickly in lower metals prices, so perhaps we are seeing signs that some of the more nervous speculation has subsided. If fundamentals are beginning to exert a bigger influence, then the outlook for base metals prices is good: demand is now reaching its seasonal peak, LME stocks are falling rapidly, and spot premiums are inching up.

However, the outlook is not uniformly good. Financial markets are pricing-in higher interest rates in Europe and the U.S., and recent data from the U.S. have heightened inflation fears. Productivity figures from the U.S., which were due after presstime, on May 4, could induce further nervousness if, as some fear, they show that productivity growth has slowed to less than 2.5%. A slowdown in productivity would heighten the risk of further interest rate rises, trimming metal demand growth rates in the second quarter. This would discourage large-scale speculative purchasing of metals, while confirm to metal consumers that their hand-to-mouth buying policy of recent months is the right one.

In the copper market, there is reason to hope prices may soon regain at least some of the higher ground seen earlier in the year. During the report period, the weekly average LME 3-month price gained 3% and total exchange stocks fell 17,000 tonnes, bringing the overall decline of the past month to almost 70,000 tonnes. Especially encouraging is that, this time round, copper prices have proved much more resilient to stock market volatility than they did back in mid-April.

The Dow Jones suffered further jitters on April 27 after a stronger-than-expected increase in the U.S. first-quarter employment cost index: 1.4% versus market expectations of 0.9%. Robust data regarding gross domestic product and durable goods added to concerns over the threat of inflation. Nonetheless, prices for the red metal held on to most of the gains made earlier in the week, trading in a range of US$1,720-1,760 on April 27 and 28. The 200-day moving average, currently at US$1,772, provided support on the way down for copper prices and is likely to provide stiff resistance on the way back up, given the technical nature of the market at present. However, if fundamentals remain firm and prices push through this level, stop-loss fund buying could add to the upward momentum. At long last, the risk for copper prices appears to be returning to the upside.

If prices do spike upwards over the next few weeks, those producers seeking to lock in forward sales will need to act quickly since, in our view, the outlook for the second half of 2000 is much less certain, in terms of fundamentals. Interest rates are expected to continue climbing in Europe and the U.S., which would lead to an inevitable slowing of copper-intensive sectors, such as construction and transport. There are already signs of this in U.S. housing starts, which are fell 7.7% between March 1999 and March 2000.

On the supply side, the availability of concentrate continues to ease, reflecting stronger-than-expected output from new producers, such as Los Pelambres in Chile and Batu Hijau in Indonesia, as well as the delayed startup of Furukawa’s 120,000-tonne-per-year Port Kembla smelter, which is not expected to reach full production until October. However, better-than-expected availability of concentrate is allowing other smelters to raise output.

Sumitomo Metal Mining recently joined several other Japanese smelters when it said it would raise copper production by 16,000 tonnes in the first half of the fiscal year beginning April 1, 2000. As a result of this and other increases, production from Japanese smelters is expected to climb by almost 50,000 tonnes, or 7.2%, compared with the previous year. Considering the slow growth in Japanese consumption, this production increase will result in a big rise in Japanese copper exports over the next six months.

The report period proved disappointing for aluminum. As copper and nickel prices rallied, aluminum prices stayed uncomfortably close to their recent lows. The LME 3-month price flirted briefly with the US$1,500-per-tonne level, but there was little follow-through buying, and prices soon fell back, ending the period at US$1,487 per tonne. In a technical market, aluminum faces stiff resistance at US$1,500-1,510 before it can target the 30-day moving average at US$1,530 per tonne.

A nervous nickel market saw prices rebound sharply to the top end of the April trading range of US$9,100-9,900 per tonne, rallying US$400 on April 26 before trading for the rest of the week in a narrow range on either side of US$9,800 per tonne. There was no fresh fundamental news on which to pin the surge in prices, though the rise in copper the previous day probably helped restore confidence. Meanwhile, the decline in inventory continues: LME stocks fell a further 750 tonnes during the period under review, and cancelled warrants now stand at 2,742 tonnes, all of which suggests there will be no immediate let-up in the rate of LME stock withdrawal.

The key short-term issue in nickel remains the threat of strikes at the Sudbury, Ont., operations of Inco and Falconbridge. Negotiations are under way, though little news is leaking out. The local union branch says it regards the current high price of nickel as an important bargaining chip. Both Inco and Falconbridge showed they are benefitting from current high nickel prices when they recently released strong first-quarter results. Inco’s profit for the first three months of the year was US$95 million, compared with a loss of US$16 million in the corresponding period of 1999. Falco’s profit for the same period was US$73.9 million, compared with a year-ago loss of US$11.1 million. The strong performance of both companies makes it increasingly likely that they will have to concede some ground to workers, perhaps in the form of a one-off bonus to account for the current high price of nickel. However, both have focused on bringing costs under control in recent years and will be keen not to give too much away in annual wage increases over the next three years.

Meanwhile, nickel production at Australia’s three laterite projects continues to climb, though output levels are still significantly below target levels. Centaur Mining’s Cawse operation saw output of nickel and cobalt in the first quarter rise by 22% and 5%, respectively, from the previous quarter; on the other hand, nickel production of 1,505 tonnes was below the target of 1,700 tonnes (itself only 85% of full capacity). Anaconda’s Murrin Murrin produced 1,835 tonnes of nickel (compared with projected output at full capacity of 10,000 tonnes per quarter) and 110 tonnes of cobalt. Bulong produced 1,235 tonnes of nickel in the first three months of 2000, whereas full capacity should eventually reach 2,250 tonnes per quarter.

Sumitomo and Rio Tuba Nickel are to participate in a joint technical investigation into the Rio Tuba laterite nickel project on the Philippine island of Palawan. The project is reported to have annual production potential of 10,000 tonnes nickel over the next 20 years. The move follows a recent announcement by Sumitomo that it is keen to expand its nickel production base and will invest in development projects in the Asia-Pacific region. These projects are expected to employ high-pressure acid-leaching technology.

Zinc managed to hold on to the healthy gains made in the previous report period. Prices consolidated in a trading range of US$1,165-US$1,185 per tonne and reached a 3-month high on April 24 of US$1,187 per tonne. Strong fundamentals still underpin the zinc market, and prices have the potential to climb above the US$1,200-per-tonne level.

Cominco, one of the world’s largest producers of zinc, has outlined a buoyant forecast. Fuelled by continuing growth in Southeast Asia and the ongoing boom in the construction sector, the major predicts a 3.5% growth rate this year in the demand for zinc. A 10% increase is projected for Taiwan; 7% for Korea; and 3% for Japan.

A somewhat less conservative forecast is offered by the International Lead and Zinc Study Group, which is calling for an increase of 3%. Again, Southeast Asia is seen as providing much of the momentum behind the jump in consumption. The group says world mine output will jump by 7.3% to 8.4 million tonnes this year and that output of refined zinc will rise by 5.2% to 8.8 million tonnes.

Australian zinc and lead producer Pasminco reports that zinc production at its new Century plant is running ahead of its ramp-up schedule. As a result, the company’s overall output in the recent first quarter was 165,037 tonnes, or 12% higher than the year-ago level of 14,000 tonnes.

Finnish major Outokumpu says it intends to go ahead with its 47-million-euro expansion at its Tara mine in Ireland, following a resolution to the recent labour dispute. The life expectancy of the mine is projected to increase by at least eight years as a result, while annual output climbs to more than 200,00 tonnes. Production for the current year will likely exceed 170,000 tonnes, or 14,000 tonnes more than in 1999.

Gold prices looked increasingly vulnerable towards the end of the report period, as a crisis of confidence once again hit the market. Prices continued to trend downwards following the sharp falls registered on April 25 and April 26, which took almost US$5 off cash prices and threatened to break through the psychologically important US$275-per-oz. level. Following the huge spike that occurred on the back the European Central Banks/Washington Accord last September, there is little to prevent prices from falling to US$250 per oz.

We expect the US$270-per-oz. level to provide some strong support initially. Also, the 200-day moving average will temporarily to hold prices up, as will physical demand, which should be rise in response to the current low price. However, given the fragile state of the gold market and the latest bout of bearish sentiment, prices at their current levels seem untenable, and a movement to a new, lower trading level, inevitable. With prices ending the day in London on April 28 at their lowest since September 1999, this does not augur well for the coming weeks.

In its latest Gold Survey, Gold Fields Mineral Services cited a lack of investment demand for gold as the obstacle to any upside potential. Despite the upturn in inflationary pressures and equity market jitters in the U.S., gold is unlikely to be the beneficiary of safe-haven buying.

A crucial test for gold prices is imminent, following the recent announcement by Swiss National Bank President Hans Meyer that sales of its 1,300-tonne surplus will take place as soon as possible. The legislation enabling the sales to go ahead became law May 1, though the precise method of sales is, as of yet, unknown.

Central bank sales for the year to September (one year after the Washington Accord) amount to 280 tonnes (the Bank of England: 150 tonnes; the Austria National Bank: 30 tonnes; and the Dutch Central Bank: 100 tonnes).

Applying the conditions of the Accord, whereby 400 tonnes may be sold in any one 12-month period, still leaves 120 tonnes available to be sold this year before September.

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