About of statistical metal releases has just arrived, and in this short report we offer an analysis of the latest data on copper, nickel, lead and zinc from their respective International Study Groups.
The common theme is that market balances have improved across all of these markets during the first quarter. Although the data are retrospective, at least they confirm our view of improving market conditions during the first few months of the year. While this provides a promising base for what should be a seasonally stronger quarter, a combination of anecdotal evidence (falling order books in the U.S., Europe and China) and actual data (in particular, the Institute for Supply Management manufacturing index, and figures tracing industrial production) suggests that market conditions have deteriorated in most key geographical areas of consumption since the start of the second quarter. This has occurred even though local prices are relatively more favourable as a result of currency developments.
Copper
The International Copper Study Group (ICSG) reports that the global refined copper surplus was reduced to 52,000 tonnes during the January-February period (39,000 tonnes in January and 13,000 tonnes in February), compared with a surplus of 161,000 tonnes in the same period a year earlier. The improved balance was helped by a 3.5% rise, year over year, in world copper usage in the first two months (driven by a 23% rise in China) and a 1.1% decline in refined production over the same period.
However, mine output has started to rise, partly as a result of an expansion at the Escondida mine in Chile, and even if market conditions are extremely constrained for smelters and refiners (in light of low treatment and refining charges, and currency-related increases in production costs), it would probably be unrealistic to expect any meaningful cutbacks of refined production. Current investigations by European and U.S. competition regulators of major copper miners suggest as much. Even if any evidence of a potential collusion is unlikely to be revealed, we think the search for this could possibly reduce further producer “discipline” in this highly concentrated market, with the world’s top 10 copper miners accounting for about 55% of total production.
Focus will surround
The combination of current demand softness and the relatively low probability of production curtailments in the near term suggests that the global refined copper market will likely move into deficit soon, and balanced market conditions can, at best, be hoped for. In light of this fundamental assessment, the recent sharp rally on the London Metal Exchange (LME) would provide a good selling opportunity. The fourth quarter of 2002 provides a good example of prices rallying (15%) in spite of weak demand data. In our view, underlying economic growth will be the prime driver for a sustainable up-trend in the copper price.
Nickel
With key interest surrounding the impact from the release of stockpiled nickel at Russia’s
The other key interest, as far as we are concerned, relates to the health of consumption and the potential mismatch between underlying economic data and operating rates at stainless steel mills, though any negative impact so far remains offset by scrap tightness and rising stainless steel capacity in China. However, the INSG reported global refined nickel consumption growth during the first quarter slowed, in comparison with preceding quarters, to only +2.4%, year over year, in March to 102,900 tonnes. That compares with average monthly growth rates of 4-6% in previous quarters. Consumption of refined nickel in the Western World was also more subdued in March, at +1.6% year over year.
Meanwhile, refined nickel output continued its route of growth for the fifth consecutive month (+4.4% in March, to 103,900 tonnes). But even with the extra material released from Norilsk Nickel (and despite the perception that at least not all is going directly to end-users, judging from LME inventory movements), we believe the global nickel market will register a sizable deficit this year and remain tight for the foreseeable future, owing to the lack of new production projects.
Lead and zinc
Supply developments have helped push the global refined lead market into its longest period of deficit (three months) for some time, and greatly reduced last year’s large global zinc surplus.
Concentrate tightness has spurred this development, with the effects from low treatment and refining charges and strong local currencies enabling more modest levels of refined output. The latest data from the International Lead & Zinc Study Group (ILZSG) show that the lead market registered an aggregate deficit of 71,100 tonnes in the first quarter of this year, compared with a surplus of equal size in the corresponding period of last year.
Zinc too saw an improvement in the balance, with the large surplus of 156,000 tonnes in the first quarter of 2002 (and 253,000 tonnes in the fourth quarter of 2002) now reduced to 42,000 tonnes. The data for zinc showed impressive consumption growth for the first three months of the year (compared with low levels a year earlier), at an average monthly global growth rate of +11%, and an average montly rate of +3.3% for the Western World. Given zinc demand’s strong correlation with economic growth, we doubt similar improvements in demand will be maintained. Nonetheless, given historically low price levels on the LME (especially expressed in euros), we regard downside price risk as extremely limited.
Global lead demand is also exceeding expectations, having risen at a monthly average rate of 8% in the first quarter, compared with the same period the previous year. However, much of this growth is driven by China, with Western World demand growth remaining in negative territory (-1.5%, year over year) in March.
PGM price differential
In other metals news, the wide price spread between palladium and platinum appears likely to persist over the near term, according to Johnson Matthey’s (JM’s) annual survey.
In line with our own forecast, JM expects platinum to remain firm in a trading range of US$590-690 per oz. over the next six months (and for the market deficit to expand). This is in stark contrast to its sister metal, which is expected to remain depressed between US$120 and US$180 per oz. over the same period, as the large supply surplus grows further. Given that key end-use applications for both metals are auto catalysts, the wide price spread might seem surprising, and because of the potential for substitution at auto-manufacturers, we offer the following analysis of the key reasons for continued substantial near-term price divergence.
Palladium purchases by the auto industry fell sharply last year to 3.1 million oz. (-39%), with drawdowns of large stockpiles representing the most significant aspect of the sharp decline (which is likely to continue for the immediate future). The switch to platinum was the other key aspect. However, a large-volume switch back to palladium is restricted, according to JM — partly because only a limited switch occurred in the first place, but also because of the increasing market share of diesel vehicles in Europe (dependent on platinum). Moreover, a reliable source of supply remains a key concern among auto manufacturers.
Russian shipments of palladium were greatl
y reduced over the past year (to only 1,900 oz., compared with estimated annual production of about 3 million oz., and shipments of 4.3 million oz. in the previous year). The decline was partly offset by increasing output in South Africa and North America, and by increasing secondary supplies. Auto catalyst recovery increased by 32% (to 370,000 oz.), a trend that’s likely to be reinforced.
The use of platinum in the auto industry grew strongly last year (+17%), but owing to de-stocking (as with palladium), purchases rose by only 4% (to 2.6 million oz.). The diesel market was responsible for a large share of the increase (approximately 70%), while the positive effects from tighter emission legislation in many geographical regions were partly offset by thrifting (reduced PGM loading without compromising the catalytic efficiency).
Apart from the geographical distribution of mine supply and platinum’s exposure to the growing diesel vehicle market, the other key difference between these two metals is the jewelry sector. While palladium has some exposure to jewelry, primarily through white gold (5%), almost 45% of all platinum consumed now goes into the jewelry sector. Strong jewelry demand from China (+14% to 1.3 million oz. in 2002) has been a key platinum price driver, which now accounts for one-fifth of total platinum consumption.
However, the strong growth in Chinese platinum consumption is likely to slow down this year, partly because of the negative effects of the Sars virus outbreak, but also because of manufacturers’ inability to pass on higher bullion prices to retailers. However, it is our view that any slowdown in current rates of Chinese platinum jewelry consumption will represent a delay rather than a destruction, owing to the underlying strength in retail sales from bridal and fashion. In addition, heavy drawdowns of Japanese platinum inventories in 2000-01 are having a positive effect on purchases, with Japanese demand rising for the first time since 1999.
The other key issue is South African supply, representing 75% and 41% of total platinum and palladium supply, respectively. The country’s output of platinum rose by 9% to 4.4 million oz., boosted by increased output at all major producers. However, the increase at
Considering platinum’s positive exposure to the jewelry and diesel vehicle markets, we agree with JM’s upbeat view on the platinum price. Even if Chinese demand comes under near-term pressure, the jewelry factor could help stabilize prices and prevent any substitution away from platinum.
Because of the large market deficit (and low inventory levels), the platinum price and lease rates are likely to remain highly sensitive to any supply disruptions. As a result, we believe our average 2003 price forecast of US$610 per oz. for platinum will be faced with upside risk.
The wide price gap with palladium is not likely to start narrowing in any meaningful way until 2005, as auto manufacturers remain reluctant buyers even at current low price levels on further inventory reductions, and as secondary supplies are on a rapid rise. As a result, our current forecast of an average palladium price of US$200 per oz. this year might seem optimistic, though forward purchases might be worth considering for an auto manufacturer as we do not believe this large price spread will persist over the long term.
Commitments of Traders
Speculative activity in commodity markets were dominated by short-covering in energy and base metals in mid-to-late May, accompanied by further long position building in precious metals. As a result, the stance of funds toward commodities has moved firmly back into net long territory for the first time since late March.
A key feature of speculative trading during the first quarter was a speculative bias towards long positions across all the major commodities markets. We doubt that the most recent data represent an early signal of a return to this pattern of trading, and indeed, we expect fund interest will remain focused on precious metals for the time being.
All key metals traded on Comex/Nymex received another boost from speculative investors in the week ending May 13. In copper, aggressive short-covering reduced the net short, which had extended to 15,000-tonne contracts in the preceding week, to only 3,000 tonnes. In addition, continuous speculative buying has likely brought Comex copper to net long territory. This speculative move has occurred at the same time as the trade-weighted U.S. dollar has come under further pressure, emphasizing the negative correlation between the two. So far, however, there is little sign of copper business directly linked to currency moves, and we believe the recent rally in the copper price is primarily driven by commodity trading advisor funds inspired by technical chart patterns. Weak demand conditions continue to discourage any sizable involvement by discretionary macro funds. As a result, we remain skeptical that the recent upward move can be sustained in the near term, though a return to a large speculative net short is increasingly unlikely.
Further long exposure has been attracted to gold, encouraged by favourable conditions for this market in light of U.S. dollar weakness, as well as global macro and political unrest. Indeed, the speculative net long expanded to its largest since mid-February, though we note the gross short position also rose, highlighting diverse views of future price movements. Additional fresh short positions in the week ending May 13 has probably added to recent price strength. Funds are also optimistic about other precious metal prices, with the net longs expanding in both silver and platinum.
— The opinions presented are the authors’ and do not necessarily represent those of the Barclays group. For access to all of Barclays’ economic, foreign-exchange and fixed-income research, go to the web site at barclayscapital.com. Kevin Norrish is head of Commodities Research/Energy for Barclays and Ingrid Sternby is a base metals analyst with the company. E-mail: kevin.norrish@barcap.com and ingrid.sternby@barcap.com
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