Metals markets were volatile during the report period May 7-11, with sharp downward adjustments in aluminum and copper prices and a dramatic rally in nickel. The London Metal Exchange (LME) 3-month nickel price gained US$525 per tonne to reach a 6-month peak of US$7,305 per tonne, while nearby spreads also tightened, helping the average cash price to gain almost 2% on the previous week.
Elsewhere, however, the direction was firmly downward, with all the other LME metals suffering losses in average cash prices ranging from minus 0.1% for aluminum to minus 1.3% for copper.
The base metals complex has staged only a faltering rally from its lows of early April and is currently one of the poorest-performing of the commodities sectors, doing much worse than oil and recently falling behind gold as well. The prospects of an improvement any time soon are not good, and so we have revised down our average copper price forecasts for this year. Although recent U.S. data releases have had some positive effect, further deep cuts to the interest rate are needed in order to sustain a recovery, and it is a matter of historical record that metals prices rarely begin a concerted recovery unless U.S. interest rates are rising. The cut (50 basis points?) in U.S. rates that was expected on May 15 probably will not be the last, and, in the meantime, Europe is looking increasingly shaky. Recent economic data from Germany showed falling industrial and manufacturing output coupled with rises in unemployment and inflation — all of which spells bad news for base metals markets. Upcoming data, including industrial production figures, will need to be watched closely for further signs of deterioration.
Once again, nickel was the strongest LME performer, as prices proved resilient against a generally weak base metals complex and poor Asian and European data. There was a strong end to the week when, on Friday, May 11, the LME 3-month price broke through US$6,800 per tonne and then gained further momentum as it hurdled the 200-day moving average at US$6,983 per tonne for the first time since January 1999. Fund stop losses were then triggered, eventually pushing prices to a 6-month peak of US$7,305 per tonne.
At the end of 2000 and in the early part of 2001, the nickel market tried to break resistance at US$7,000 per tonne. The success of this latest attempt, together with the strong signal sent to the market, suggests that prices are now likely to consolidate around US$7,000-7,200 per tonne, and possibly US$7,000-7,400 per tonne. The latest price action is in line with our forecasts that the nickel market is vulnerable to a price spike, owing to supply constraints (principally a shortage of stainless steel scrap) and the ability of the U.S. economy to avoid a recession (which keeps the metals complex more buoyant).
Copper prices, meanwhile, continued their descent, shedding around US$60 per tonne as the market reacted negatively to poor European and Japanese economic data and failed to take any strength from a 10,000-tonne fall in global exchange stocks. Speculative funds are already running large short positions. The Commodity Futures Trading Commission reports that on May 8, funds on the Comex division of the New York Mercantile Exchange indicated 167,000 tonnes of copper, compared with 190,000 tonnes in the previous week, so it seems likely that the collapse during the report period was due to small amounts of long liquidation rather than fresh selling. Volumes were certainly thin during the week of May 7, and even if the fund short position has not been augmented, it still provides potential for a short-covering rally to lift prices. However, with market sentiment still poor, prices may need to move lower before any concerted upward momentum can be regained. For the short term, we tend to favour the downside, with a test of US$1,654 per oz. (the low of early April) quite likely. On the upside, prices need to break above the recent high of US$1,740 per tonne to establish fresh upward momentum.
Phelps Dodge, the world’s second-largest producer of copper, says prices are probably close to the bottom of the cycle, that supply-demand fundamentals are strong and that current stock levels, at just six weeks of consumption, would normally be associated with higher prices. Although we agree with the general thrust of the company’s comments, we would point out that there is still some uncertainty over demand prospects. Of particular concern are signs of a deterioration in Europe, as evinced by the worse-than-expected German economic data. Not until there are clear signs of a bottoming-out in the global economy will copper prices begin to improve significantly. With this in mind, we have reduced our average 2000 copper cash price forecast to US$1,850 per tonne (from US$1,950 previously), implying an average price for the rest of this year of US$1,920 per tonne.
Aluminum prices fared poorly during most of the report period, with the LME 3-month price shedding almost US$50 per tonne from its early-week high to hit a low of US$1,517 per tonne on May 11, before rebounding to end the week at US$1,534. Long liquidation on May 10 was responsible for most of the damage after it was revealed that, contrary to an initial report, power supplies to the Krasnoyarsk smelter in Russia had not been cut. Nearby spreads were also volatile, but there is little sign of tightness fading yet. The cash-to-3-month backwardation ranged between US$25 and US$14 per tonne and ended the week firm at US$22 per tonne. The premium on prompt material attracted sizable quantities of metal into LME warehouses, resulting in a net increase in stocks of 28,000 tonnes for the week. There are rumours of further large deliveries to come (as much as 75,000 tonnes, according to some sources), and we would not be surprised to see LME stocks rise further in the week ahead. For the time being, support for the LME 3-month price appears firm at US$1,520 per tonne. Even if this does give way, it is difficult to see prices falling much below US$1,500 per tonne in the short term, given the tight supply backdrop.
Zinc prices continue to trend gradually downward, regardless of events elsewhere in the base metals complex. The LME 3-month price hit a new low for the current cycle of US$961.50, its lowest since June 1999. LME stocks continue to trend upward, climbing by 3,400 tonnes during what is traditionally the strongest time of the year for zinc demand. Indeed, total LME stocks are now almost 66,000 tonnes above levels at the start of the year, and even if the underlying market is in better balance at present (reflecting seasonal factors), it is clear that there is ample inventory available to satisfy demand.
This factor helps explain the lack of reaction to the end of the short-lived strike at the 125,000-tonne-per-year Cajarmarquilla smelter in Peru. With neither funds nor consumers showing any inclination to buy, there appears little to prevent zinc from drifting lower. Indeed, it’s looking increasingly likely that we will see a return to the January 1999 low of US$914 per tonne for the LME 3-month price.
The improvement in gold prices continued, with prices reaching 2-month highs of just above US$270 per oz. A sharp move through the 200-day moving average on May 9, which began with some significant buying activity earlier in the day in London, was the initial cause of the rise. The push through to the US$270-per-oz. level was the result of short-covering, which added momentum to the price increase amid the most hectic levels of activity the gold market has seen for some time. Despite the increase, we remain skeptical that a move above US$270 per oz. is achievable; if it is, the chances of such a move being sustainable are limited.
With the net speculative short position on Comex still large at 25,788 lots, the market remained nervous until the latest Bank of England auction was over. Recent strength in the U.S. dollar and a more encouraging outlook for that country’s economy during the second half of 2001 continue to keep local gold price
s high, suggesting that physical demand figures for the year will be disappointing.
Market readjustments to higher lease rates are resulting in a greater degree of stability, though at historically higher levels. The outcome is that even while prices have remained at 2-month highs, lease rates have been able to ease back to lower levels.
— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.
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