METALS COMMENTARY — Markets feeling supply pressure

In many jurisdictions, governments are continuing to interfere in commercial trade activities. And while the consequences are not expected to be serious in the long term, metal prices will likely be affected in the near future.

The major aluminum-producing countries, including the U.S. and Canada, supported by local producers, signed an accord to reduce output, and, as a result, prices rose. Producers who would eventually have had to throw in the towel were encouraged to remain open. In addition, producers in the Commonwealth of Independent States, whose home markets faltered and whose exports surged into Western markets (causing much of the Western oversupply), did not cut back to agreed-upon output levels.

Many countries, including Canada, rushed to sign the Basel Convention agreement, which was initially intended to control the shipment of hazardous wastes from industrialized countries to those that are less industrialized. Contrary to the recommendations of many industries, the Basel net was extended to cover not only wastes but also commercially traded scrap, including steel and most non-ferrous materials such as zinc ashes. The treaty categorizes materials as green, amber and red. Yet authorities in several countries have deemed all such materials as “red” and therefore subject to extensive paperwork at numerous levels. In response, many shippers are refusing to ship, causing several countries to suffer shortages of some key raw materials.

In Russia, the government has moved to rescind its latest method of export licences, which were not working well. It seems exporters resented paying unreasonable percentages of the product value for the privilege of employing its citizens and generating national wealth.

As a result, there has been a flood of pent-up metal on Western markets in recent days. Examples are found in lead, zinc, nickel and cobalt. It is uncertain what additional metal tonnage will finally appear and how long the process will take. An industry source for cobalt speculated that the extra flow of material may already be over.

In Venezuela, in response to a run of bank failures, the government has recently moved to tighten its control of trade by choking off access to foreign exchange. A government committee must now approve each request for dollars to pay for imports. Many domestic industries expect to close shortly, owing to a lack of parts and materials.

In North America, economic growth is holding and demand for metals is expected to remain firm through the balance of 1994. Europe appears finally to be on an upswing and Japan is also showing signs of economic life. The following average prices and inventories of the London Metal Exchange (LME) are for the month of August to date, with last month’s figures shown in parentheses.

Several factors — the seasonal resumption of Russian shipments, clouded with material appearing because of changes in export licences; some lost production at Inco; and the threat of a strike on Aug. 31 at Falconbridge — eased nickel prices to US$2.65 (US$2.82) per lb. as inventories grew to 137,430 (133,344) tonnes.

Strong merchant buying at recent U.S. government stockpile sales set a firm tone to the cobalt market, as prices moved narrowly at US$22 (US$22.50) per lb.

The growth in lead stocks to 367,875 (356,425) tonnes eased prices to US25.7 cents (US26.3 cents) per lb.

Amid good North American demand and political pressure to suspend U.S. zinc stockpile sales for now, prices fell to US42.6 cents (US43.7 cents) per lb. and ever-rising stocks reached 1.23 million (1.21 million) tonnes. Attributed to slow seasonal demand, the combination of inventories on the LME and the Commodity Exchange of New York rose to 385,622 (372,017) tonnes as LME copper prices drifted to US$1.08 (US$1.11) per lb. Several developments are being assessed by market-watchers, including the impact of large American copper companies hedging significant portions of their production, losses by producers elsewhere, expected increases in Chilean production and rising demand.

In quiet markets, molybdenum oxide prices remained unchanged at US$3.50 per lb.

In precious metals, gold eased to US$378.85 (US$385.45) per oz. and silver retreated again to US$5.16 (US$5.28) per oz. These two metals have remained stubbornly unmoved by the relatively large rate surges and rhetoric in surrounding financial markets.

Rumors continue to dominate the platinum group metals as each bit of news is analyzed for its impact on ever-rising prices. One has to assume that production, consumption and demand are all up and that investor speculation is adding extra vigor to the price move. Industry experts do not expect to see much deviation from current trends.

Production of both metals is around 4 million per oz. per annum, and if auto companies were to swap 2 million per oz. of platinum contained in catalysts for 2 million per oz. of palladium, the price structure for each metal would also be switched. Platinum rose slightly to US$412.35 (US$411.17) per oz., palladium moved ahead to US$152.15 (US$145.99) per oz. and rhodium eased to US$850 (US$875) per oz.

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