METALS COMMENTARY — Metals return to fundamentals

Metal markets continued to show signs of recovery in March as supply-demand fundamentals regained prominence.

Metal manufacturers throughout the Organization for Economic Co-operation and Development trading area were profitable and fully booked, with some product lead times stretching for months.

While the lower virgin metal price levels encouraged buying (to restock inventories), scrap prices resisted similar sharp declines, a reflection of the fact that, at current prices, shortages persist. During the past decade, the structure of the scrap industry was altered drastically. Tremendous improvements in computer designed usage by all types of manufacturers have reduced new scrap generation to tonnages as low as 10% of purchases, compared with 25% to 30% a few years ago. Supplies from old-scrap generation (mainly demolition) fluctuate in response to economic vicissitudes, new technology and price changes.

At the same time, basic metal manufacturers have prospered. The steel industry, for example, has expanded sales of custom-designed shapes and altered its ability to recycle scrap by expanding its use of direct reduction and electric arc furnaces, at the expense of the traditional (and more expensive) blast furnace technology.

As a result, the scrap industry continues to experience a fast-growing appetite, together with a falling supply condition, which should benefit suppliers of virgin metal.

The recent fall in the value of the U.S. and Canadian dollars has caused overseas demand for scrap and manufactured products to surge, a trend which is expected to benefit producers operating under the North American Free Trade Agreement.

Meanwhile, big-ticket purchases continue to drop, in particular, the U.S. auto and housing sectors. If high interest rates persist, first-tier consumer metals (aluminum, copper and zinc), and then the other base metals, would feel the effects.

Nevertheless, despite lower price levels for base metals, those markets remained basically unchanged last month.

The following average prices and inventories of the London Metal Exchange (LME) pertain to March, with the previous month’s figures shown in parentheses (unless stated otherwise).

Residual speculative selling caused nickel to drop to as low as US$3.24 per lb. before the fundamentals of falling stocks and strong demand returned the metal to stability. Nickel steadied at US$3.42 (US$3.86) per lb., as inventories fell again, on March 31, to 122,436 tonnes (compared with 132,558 tonnes at the end of February).

Three factors — U.S. government sales, rising demand and reports of increasing production outside Africa — supported cobalt as free-market quotes for Western A grade eased slowly to US$27 (US$29.50) per lb. A lack of smelter and refinery feed and steady demand kept lead virtually unchanged at US26.6 cents (US26.3 cents) per lb., as stocks fell again to 293,050 (312,350) tonnes.

News of shortages in galvanized sheet maintained zinc at US46.4 cents (US46.8 cents) per lb., as stocks dropped again to 1 million (1.1 million) tonnes. Robust demand seemed to absorb increased production as the combination of inventories on the LME and the Commodity Exchange (Comex) of New York fell again, to 248,108 (297,500) tonnes, with LME copper rising to US$1.33 (US$1.30) per lb. The Comex inventories are now minimal at 8,208 tonnes. Announcements that several U.S. producers are moving to start up shuttered capacity caused a drop in spot price quotes for molybdenum oxide. At the end of March, the figure stood at US$12 per lb., compared with US$15 at the end of February. Producers, meanwhile, have all adjusted their April quotes to US$12.

Currency unease and a drop in central bank sales firmed gold to US$381.82 (US$376.75) per oz., and spot prices began to surge at month’s end. On little news (but lots of rumors about “fund buying”), silver fell to US$4.65 (US$4.72) per oz. At month’s end, however, the price surged, climbing well beyond US$5.

In firm markets, platinum edged up to US$416.50 (US$414.19) per oz., along with palladium which rose to US$162.59 (US$157.05) per oz. Still under growing supply pressure, rhodium fell to US$440 (US$500) per oz. — Jack Dupuis is a metals agent, broker and consultant specializing in the marketing of metals.