Base metals prices achieved fresh highs for the year during the 5-day report period ended March 8, maintaining the steep upward trend established since late February.
So far, the London Metal Exchange (LME) weighted index of metals prices has climbed almost 6% in March. Copper and nickel continue to lead the complex. During the week under review, both achieved their highest price levels since mid-2001. Consumer buying remains absent, but macro hedge funds, responding to a pickup in leading economic indicators, are now adding their weight to that of the smaller technical funds, which have so far been the main providers of upward momentum.
The market has proved highly responsive to better-than-expected U.S. economic data. However, with little metals-related news expected until mid-March, when the February industrial production figure is unveiled, some long-overdue price consolidation looks likely.
After the dramatic decline in metals demand last year, restocking is likely to exaggerate the early stages of any recovery in consumption. With LME stocks holding a greater share of total primary metals inventory than is normal for this stage of the economic cycle (due to the demise of Enron and its off-warrant financing), restocking should quickly show up in falling LME inventory levels as material is relocated to consumers. Copper and aluminum stocks normally rise in the first quarter, purely for seasonal reasons. However, if the recent improvement in indicators for metals demand proves accurate, then stocks should begin to fall rapidly as we approach the second quarter.
After gaining almost US$50 per tonne to hit an 8-month high of US$1,646 per tonne on March 7, copper prices look in need of consolidation. A second unsuccessful attempt to break above US$1,650 per tonne on March 8 resulted in a pull back to the US$1,630-per-tonne level and copper needs to keep above US$1,620 per tonne if it is to hold its recent gains.
Leading indicators for copper demand in the U.S. and Europe are now pointing firmly upward, but there is little sign of any pickup in physical activity. The German producer of copper products, Wieland-Werke, says it expects to see a fall in sales volumes of between 10% and 12% in its 2001-2002 financial year, which began in October. So far, in 2002, it sees no sign of an improvement in turnover or volumes sold. This news came soon after a decision by another German copper fabricator, Prymetall, to stop weekend shift working because of poor demand. In addition, data from the U.S. Copper and Brass Servicenter indicate a 22% decrease in shipments in January.
Despite rumours of production restarts, aluminum prices convincingly hurdled recent resistance at US$1,410 per tonne but proved unable to extend their gains through US$1,446. The US$1,410-per-tonne level remains crucial, and if prices can consolidate above it, further gains may be in store.
The first move above the 200-day moving average since October 2000 has produced a much stronger technical position for zinc prices in a short period. Although prices may not be able to remain in this area without a test of support at US$820 per tonne, the break of resistance at this level has reduced the risks of a return toward recent, historic lows and even a further dip below US$800 per tonne. Although the price increase was undoubtedly led by the firmer metals complex, it is possible to distinguish factors within the zinc market itself which have added to the upward moves. Going forward, the sustainability of the rally depends largely on the extent to which the metals complex can consolidate these gains and also the extent to which developments within the zinc market continue to act as a feature of price movements. If both these variables act in zinc’s favour, the result should be good price support combined with a possible return back above US$1,000 per tonne over the next quarter.
The zinc market has received encouraging data. The key impetus to higher prices is coming from the supply side, which recently has proved reluctant to adapt to zinc’s fundamentals. The decision by Big River Zinc to close its Illinois refinery for three months over the summer will remove 23,000 tonnes from total production levels of refined zinc this year, while the strike at Grupo Mexico’s 100,000-tonne-per-year San Luis Potosi mine may also lead to short-term supply disruptions. Also, if industrial demand indicators in the U.S. continue to point upward, price risks over the first half of this year are likely to move to the upside as well.
Nickel prices have proved more than capable of climbing above their well-established trading range. The break of initial resistance at US$6,200 per tonne and then at US$6,400 per tonne is certainly impressive but not surprising. Nickel has a tendency to store upward momentum and release pent-up price movements in a more violent way than other metals, as market illiquidity and sudden physical tightness are features of trading conditions. With prices having met firm resistance through profit-taking and long liquidation at US$6,600 per tonne on March 8, nickel requires a period of consolidation if these latest gains are to be retained. Initial support lies at US$6,400 per tonne, though, with prices having risen so far so soon, a drift to lower support levels near US$6,200 per tonne would not be surprising.
Fundamental changes in nickel over recent weeks justify, to some extent, the higher price. During the report period, LME inventories declined by 1,884 tonnes, and since the start of the year, stocks have registered only a small net increase of around 350 tonnes. The outlook for the stainless steel sector has also improved, and the scrap sector has tightened further. The other key change has been the noticable reduction in material leaving Russia, owing to to Noril’sk’s exit from the export market in January. However, export flows resumed in February, and exports for the year are expected to remain unchanged from 2001’s higher-than-expected level. Gains based on low Russian supplies may therefore prove to be short-lived.
A neutral U.K. gold auction did little to help support spot prices as the market fell victim to several waves of Japanese investor liquidation. Given the dramatic rise in the value of the yen against the U.S. dollar, from 133.3 to 126.4, it isn’t surprising that Japanese investors rushed to sell, as the value of gold in local currency fell by almost 7% in the space of a week. After falling to a 1-month low of just below US$288 per oz. on March 7, spot prices staged a rather unconvincing recovery on March 8, climbing back up to just below US$290 per oz. by the London close.
Technical consolidation between US$288 and US$294 per oz. is now possible after the recent big falls in gold. But with small investors in Japan still holding around 2.5 million oz. and funds on Comex net long by almost 3 million oz., prices are still highly vulnerable to long liquidation, and we expect a move back into the low US$280s before long. In the short term, key technical levels will be US$288 per oz. for support, with resistance between US$292 and US$294 per oz.
— The opinions presented are the author’s and do not necessarily represent those of the Barclays group.
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