METALS COMMENTARY — Supply side volatility

While fundamentals are still weak in several metal markets, supply side problems are causing prices to become increasingly volatile.

Unexplained slowdowns in Chinese government-controlled exports are disrupting molybdenum and, lately, antimony markets.

What’s more, government mismanagement and other ills have cut cobalt production by startling amounts in Zaire and Zambia.

Russian production levels of most metals seem to be in a freefall, resulting in a race between declining production and consumption, with only the remaining surplus being exported to world markets.

New and ever more costly environmental legislation in North America has slowed many new mines and caused a growing exodus to Central and South American mining districts.

Speculators with enormous pools of investment funds continue to cruise world markets, looking for opportunities, commercial or otherwise. Mismanagement by governments attracts currency interest and profits for those ready to test government resolve and propaganda. The main bright star is the robust U.S. economy, which, to date, seems to be ignoring the recent interest rate hikes and continues to fuel at least reasonable sales in most world industrial sectors.

Given this healthy condition, and considering also the slowly rising consumer sales in Europe and Japan, better demand for metals of almost all types is expected for at least the balance of this year.

Among base metals, spurred by speculative interest and good physical demand, copper and nickel lead the parade.

(The following figures and inventories of the London Metal Exchange cents LME] are for the month of May to date, with last month’s figures shown in parentheses.) Booming stainless steel sales, slow Russian shipments and concern about a strike at Inco pushed average nickel prices to US$2.76 (US$2.45) per lb., as inventories slowly eased to 131,946 (133,752) tonnes. (Inco and the union reached a tentative 3-year deal covering Ontario division operations, two days before the May 31 deadline.)

Ignoring trade warnings of looming shortages, Western brands of cobalt settled firmly at US$23 (US$26) per lb., with Russian product at US$18 (US$22).

Three factors — falling mine output, shortages of finished metal in some areas and influx of Russian-made product — kept lead prices firm around US21.4 cents (US20 cents) per lb., as stocks increased again to 350,025 (339,775) tonnes.

Falling copper-lead-zinc mine output, of which antimony is a byproduct, and reports of slowing Chinese shipments has sharply tightened up supply and raised prices to US$2,600 from US$1,600 per tonne.

Still showing poor fundamentals, zinc stocks surged again to 1.2 million (1.1 million) tonnes as prices, mainly in sympathy with active copper, improved marginally to US43.4 cents (US41.9 cents) per lb.

Reports of the strongest U.S. production and consumption seen in years, together with falling inventories and growing European demand, propelled copper prices to US97.2 cents (US85.4 cents) per lb. as inventories on both the LME and the Commodity Exchange of New York declined smartly to 422,827 (502,239) tonnes.

Showing surprising resilience, precious metals prices held steady as markets continued to study developments, particularly in Africa and Russia. — Jack Dupuis is a metals agent, broker and consultant specializing in the marketing of mining properties.