Aluminum and copper prices continued to drift downward in the early part of the report period March 6-10 before fund short-covering in thin volume took prices back up to the top end of their recent ranges. Nickel remains the star performer on the London Metal Exchange (LME), having climbed close to the 1995 high of US$10,500 per tonne. Zinc, too, continued to move steadily away from its recent lows.
However, the performance of copper and aluminum, which account for the bulk of LME turnover, has been generally disappointing for the year to date. High levels of Chinese copper buying and a steep increase in withdrawals of aluminum out of LME warehouses have yet to exert much influence on prices other than to slow their descent. Both markets need a strong upturn in consumer buying if they are to snap out of their recent lethargy; so far, however, there appears to be little sign of this.
Copper continues to be hampered by the perception that there is plenty of metal around to satisfy demand, and it is difficult to argue with this. Total exchange stocks have climbed back above 1 million tonnes, and cancelled warrants on the LME (an indication of how much stock is likely to be shipped out of warehouses over the next few weeks) remain low at just 28,000 tonnes.
Although the trend in global copper exchange stocks remains upward, the rate of increase slowed a little during the period under review. LME copper stocks climbed just 4,400 tonnes; Shanghai Futures Exchange stocks climbed by just over 2,000 tonnes; and Comex stocks continued to edge upwards, rising by around 400 tonnes.
Since the beginning of the year, global exchange stocks have risen by 63,000 tonnes. Currently, they stand at a shade over 1 million tonnes. It is in Europe that stocks have climbed most rapidly, though they have increased substantially in Asia as well. The U.S. has seen a much smaller stock increase, thanks to sizable net withdrawals from the warehouses in Los Angeles, Calif. (minus 13,000 tonnes), and Long Beach, Calif. (minus 7,400 tonnes).
Figures reported by the International Copper Study Group (ICSG) confirm that unreported stocks of the red metal are also high. Despite the strongest year of demand growth since 1995 (plus 4.5%), there was a global copper surplus of 349,000 tonnes. However, stocks rose by only 74,000 tonnes, suggesting an increase in unreported stocks during 1999 of 275,000 tonnes. (This figure includes exchange stocks on the LME, Comex and Shanghai plus reported producer, consumer and merchant stocks.)
On the mining front, a World Bank report has called for the immediate closure of the 190,000-tonne-per-year Ok Tedi mine on environmental grounds. Broken Hill Proprietary, owner of the Papua New Guinean operation, is known to be uncomfortable about continuing to operate the mine, owing to the environmental concerns. In the short term, however, there appears little likelihood of closure since the economy of Papua New Guinea is heavily dependent on the mine. Around 10% of the country’s gross domestic product comes from Ok Tedi, and it is also the only major industrial employer in the country’s western region.
With the market heading for the busy second-quarter demand period, it is surprising that the market has not yet responded to rapidly falling LME stocks. The rate of LME stock withdrawal is averaging around 18,000 tonnes per week at present, and cancelled warrants total around 100,000 tonnes. All of this suggests that stocks will continue to fall rapidly for the foreseeable future.
One factor that has dampened the impact of the stock decline is the widespread perception that shipments out of LME warehouses are being made by a merchant that held a long position during the recent squeeze on the LME. The merchant is duty-bound to take material off-warrant since it justified its position to the LME by claiming it needed material for delivery to customers. As a result, other material is being displaced into off-warrant stock, and the overall inventory position is fairly stable at present.
March 10 saw IPAI stocks rise by 69,000 tonnes (the largest monthly increase since August 1999), bringing the total to 1.9 million tonnes. The increase reinforces the view that there is little need for consumers to be concerned about availability.
Striking workers at Pechiney’s smelter in Dunkerque, France, have ended their 19-day blockade of the plant, and management and local unions are said to be negotiating a return to work. The plant was kept in operation during the strike in order to prevent the pots from freezing over, though output has been low-quality and not suitable for delivery to customers.
An announcement by Kaiser that Gramercy is on target to restart alumina production in the third quarter and should be running at 70-90% of its increased 1.1-million-tonne capacity by December has strengthened our conviction that alumina availability will not be a factor in constraining primary production growth this year. Global alumina production grew by a surprisingly large 237,000 tonnes in the fourth quarter of 1999. A large portion of the increase came from Latin America, where, at a recent analysts’ conference, Billiton claimed to be getting 6-7% extra output from its 1.8-million-tonne-per-year Paranam and 1.2-million-tonne-per-year Sao Luis refineries. We suspect that several other refineries have also lifted production above rated capacity levels to take advantage of the highest alumina spot prices in more than 10 years.
Actual and potential interruptions to supply remain a key factor supporting prices. Talks between management and striking workers at Eramet’s Le Nickel SLN came to nothing. Blockades that have prevented shipments of ore from local mines to the Doniambo smelter remain in place, and a company spokesman said no agreement was expected soon but that the plant will continue to operate at 70% of capacity. Eramet has also begun warning clients in the U.S. and Europe that contracted deliveries of ferronickel could be reduced by as much as a third from April.
Owing to the high price of nickel, Korea’s largest stainless steel producer, POSCO, intends to raise its consumption of stainless scrap from around 36% of its total feed at present to 40%. It will also seek to raise stainless steel prices to reflect the higher nickel price. As stainless steel production and consumption increases, the availability of scrap also tends to rise. Stainless scrap prices in Asia have risen only US$150 per tonne since January, compared with an increase in nickel prices of US$2,000 per tonne over the same period.
The report period saw a continuation in the recovery in
background of healthy supply and demand fundamentals and low stocks. Prices have been trending steadily higher in recent weeks, though they are still vulnerable to some residual long liquidation by funds and the threat of high levels of Chinese exports. On March 9, the LME 3-month price reached US$1,159 (its highest level since late January) but finished weak on March 10, closing at US$1,148 per tonne.
In light and lacklustre trading for most of the report period,
London prices on March 10 were strengthened by the previous day’s rebound on the Comex, as short-covering jolted prices upwards. The appreciation of the yen against the dollar also helped to firm the gold price a little during overnight trading. However, on March 10 in London, gold lost much of its earlier gain, ending at US$288 per oz.
Some positive news for gold came from the announcement by Australia’s Delta that it had hedged 560,000 oz. in February. The increased hedging, which goes against recent announcements made by other producers, at least shows that the market is currently in a fit state to absorb these extra increases in supply. Sales from Switzerland, whose central bank will be the next player to take centre stage in the arena of gold selloffs, may not have such a weak effect on prices.
Although the decline that started at the end of February has met some support at US$290 per oz., we believe it has only been temporarily stalled. The upcoming U.K. sales mean that sharp movements before March 21 are unlikely, but, once the sale is complete, a drift back down to the US$285-$280-per-oz. range can be expected.
The views and opinions expressed are solely those of the author and do not necessarily represent those of the Barclays Group.
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