METALS COMMENTARY — Are metals prices about to peak?

Surging metals prices are attracting the attention of consumers and investors. Bolstered by ever-stronger physical demand, prices for many metals are now at or near the pre-recession levels of several years ago.

The recession induced efforts to reduce costs, and now metal producers (or at least those who survived) are in a position to raise prices dramatically. Indeed, prices are already jumping, probably at unsustainable rates. Government assertions that inflation has been beaten into the ground are ringing false. The problem has been merely simmering.

Metal producers will need to realize higher prices and recover what losses they can as they prepare for the next downturn, however far off that may be. On the other side of the price coin, customers are ferociously attempting to resist the rapidly rising metals prices, sometimes to their detriment. For example, mill buying price ranges for scrap are increasingly difficult to maintain, as material can often find an alternative home in one of the competitive economies. By the time the policy changes, the shortage may worsen and prices may notch up faster. Prodded by tight supply, 304 stainless scrap (containing 18% chrome and 8% nickel) is selling at US$1,200 per long ton, and 316 stainless scrap is selling at US$1,800. Many mills have announced surcharges for grades with nickel or molybdenum contents. Adding to the above supply and price chaos is the fact that interest rates are rising not only in the U.S. but in competitor countries as well, as they attempt to keep their debt financing in place with evermore skittish lenders. The following prices and inventories of the London Metal Exchange are for January to date, with December’s averages shown in parentheses. In base metals, strong sales, prices and steadily declining stocks characterized most markets. Expected falls in Russian exports of nickel and repeated offtakes dropped inventories to 145,158 (148,080) tonnes and pumped the price to US$4.28 (US$3.88) per lb.

Tightly held supply pushed cobalt free-market quotes for Western A grades to US$31 (US$29.50) per lb. and is also forcing manufacturers to impose alloy surcharges.

Strength in the auto sector, coupled with seasonal weather, edged lead ahead to US30.1 cents (US28.8 cents) per lb. as stocks fell steadily to 332,625 (343,425) tonnes.

Healthy industrial production, aided by the momentum created by other metal gains, pulled zinc ahead to US52.4 cents (US50.6 cents) per lb. as stocks went down slightly to 1.18 million (1.19 million) tonnes. (At this rate, it will take many moons to reach normal stock levels.)

While the combination of inventories on the LME and the Commodity Exchange of New York rose to 332,817 (326,795) tonnes, copper remained near its recent highs at US$1.36 (US$1.35) per lb.

Shortages continue to plague molybdenum markets. Oxide spot price quotes in the US$20-per-lb. range have eased back to US$18 (US$15) as major consumers resist the recent advances. Their January prices are thought to be around US$12-13.

Spurred by growing jewelry demand and world currency problems, gold strengthened to US$378.56 (US$379.48) per oz. and silver rose to US$4.77 (US$4.78) per oz. Both metals have again tested recent lows and recovered. Platinum group metals remain consolidated after year-long gains in 1994. Platinum fell, and then recovered to US$412.57 (US$409.70) per oz., while palladium rose to US$155.55 (US$153.62) per oz. Rhodium again was weaker, at US$610 (US$655) per oz.

— Jack Dupuis is a metals agent, broker and consultant specializing in the marketing of mining properties.