Copper, nickel prices under pressure

Base metals markets did their best to rain on the parade of the annual industry gathering in London. Fund liquidation saw copper and aluminum prices both shed around US$60 per tonne early in the report period Oct. 2-6, while nickel shed more than US$400 per tonne (though a recovery on Oct. 5 and 6 had cut those losses somewhat by the close of the week). Lead also suffered a major loss, losing 7% of its value, owing to an unexpected 50% increase in London Metal Exchange (LME) stocks.

It was not just prices that took a knock — market sentiment dipped notably. But was this in response to a significant worsening of fundamentals, or was it perhaps a backlash against some of the extreme optimism of early September? Anecdotal evidence of a rapid slowdown in aluminum demand in the U.S. is pervading the market at present, but it has been obvious for some time now that the U.S. economy is slowing. At the same time, the outlook for economic growth in the rest of the world is still firm, LME stocks are low and falling for most metals, and the tightness developing in nearby spreads suggests that there are serious concerns about metal availability. Still, we think it is too early to be pessimistic just yet. The fourth quarter may now see some overdue consolidation in copper and aluminum prices, but we remain confident that market fundamentals will strengthen early next year, putting upward pressure on prices once again.

Copper prices came under pressure during the report period as funds liquidated long positions. However, the volume of fund liquidation was not as heavy nor the price fall as steep as it was for aluminum. The LME 3-month price shed almost US$60 per tonne in the space of two trading days before support kicked in the low US$1,930s.

Tightening in nearby spreads helped to stem the downward trend as the December-to-3-month spread moved into a US$6 backwardation on Oct. 6 and the cash-to-3-month narrowed to a US$9 backwardation. The recent 14,400-tonne increase in cancelled warrants is another positive factor.

There is some uncertainty about copper’s fundamental prospects over the report period, particularly in regard to the strength of U.S. demand. We have argued for some weeks now that the recent copper price rally was overdone, and prices are now expected to adjust lower during the fourth quarter. However, copper’s fundamental outlook remains firm. On Oct. 6, the U.S. Copper and Brass Service Center Association said its members’ shipments rose in August, compared with July, and that it expects the fourth quarter to be a solid one for brass mill product demand.

Aluminum prices ended the report period perched precariously above support at US$1,530 per tonne after heavy volume fund liquidation saw the LME 3-month price shed almost US$60 per tonne in two trading days. The catalyst for the downward price move appears to have been rumours that LME stocks were about to increase by 15,000 tonnes in Europe. This failed to materialize, but the rumours are symptomatic of a sudden weakening in market sentiment.

In the past few weeks, European premiums have contracted as a result of increased supplies of material rumoured to be from the Middle East. Also, the market is pervaded by anecdotal evidence of sharp falls in U.S. demand, de-stocking, and consumers selling metal back to merchants and consumers.

Our medium-term outlook for aluminum remains positive, and, barring a major collapse in U.S. demand, we continue to forecast a substantial deficit for early next year. The recent tightening in nearby spreads, which saw the cash-to-3-month differential contract to a US$10 contango, suggests that there are still concerns about supply in the fourth quarter, and it will be interesting to see if further tightening results in a reversal of the long downtrend in LME stocks.

Like the rest of the base metals complex, nickel prices suffered a sharp sell-off, but, unlike copper and aluminum, there was little sign of a recovery on Oct. 5 or 6, and the LME 3-month nickel price ended the week at US$7,840 per tonne. The US$7,800-per-tonne level is a key support level, and, if it is broken, prices could quickly head back to the next level of support at US$7,400 per tonne.

A key factor in weakening nickel market sentiment was a projection by the International Nickel Study Group (INSG), suggesting that the market will show a deficit of just 9,000 tonnes this year. Earlier in the year, the INSG had forecast a deficit of 25,000 tonnes. Perhaps of more concern to nickel market participants is the INSG’s projection of a 35,000-tonne surplus next year. By way of comparison, we are forecasting a deficit of 15,000 tonnes next year and a surplus of only 3,000 tonnes in 2001.

Zinc remained largely immune to the sell-off that affected other LME base metals during the period under review. Holding on to support at US$1,150 per tonne, prices traded in a US$10 range, meeting resistance on the upside. Prices on Oct. 6 finally gave way to the downward pressure, along with heavy falls in lead prices, to close in London at US$1,145 per tonne, the lowest in more than two weeks.

LME stock levels continued to fall, shedding nearly 2,400 tonnes despite the backwardation in the zinc market. Nearby spreads eased as the week progressed, with cash-to-3-month ending at a US$5 contango.

Heavy fund-selling following Oct. 6’s weaker finish has pushed prices to a 4-month low, with prices under heavy downward pressure and pushing at US$1,120 per tonne.

In the gold sector, further strengthening of the U.S. dollar has once again resulted in a test of the US$270-per-oz. support level, with prices briefly dipping to hit a low of US$269 per oz. on Oct. 6. Prices staged a mild recovery from these lows, however, and closed in London at US$270.1 per oz. — the third-lowest close since last October, when prices were on an upward rebound on the back of the Washington Agreement announcement.

In the short term, foreign exchange markets and the “will they or won’t they” scenario over central bank intervention will continue to determine price moves. The prospects do not look good, however, and the risks for gold are firmly on the downside.

The surprise decision by the Reserve Bank of Australia to leave interest rates unaltered sent a clear message to the market that the weak underlying state of the Aussie economy was of more concern to the central bank than a weak Australian dollar. The decision pushed the dollar down to three fresh lows, with the lowest dip, to 0.5300, occurring on Oct. 6.

Meanwhile, the still-beleaguered Euro lost ground against the U.S. dollar and reached a fresh, post-intervention low of 0.8678. Against this backdrop, unless further surprise intervention in a consolidated effort by central banks takes place, we expect the US$270-per-oz. support level for gold prices to come under renewed downward pressure, with the next support level coming in at US$268 per oz.

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