METALS COMMENTARY — Metals markets in correction mode

A correction phase seems to be taking hold in most metals markets, no doubt a result of last year’s bull market and the accompanying speculative excesses that quickly pushed some prices to levels not seen since the late 1980s.

Throughout February, heavy waves of selling for most publicly traded metals breached several resistance levels, upsetting the plans of many market-players.

Besides the producers (who, after all, are used to risks), unhedged investors, manufacturers, wholesalers and consumers will be faced with potentially significant losses or gains, depending on their strategies and where metal prices go from here. It is not yet clear what effects such developments will have on the host of funds, derivative players and bank financiers.

Speculative losses by some of the most conservative companies in the world have been on the increase, with each “unexpected” turnabout in the market causing a few more to end up on the slag pile.

Management, whenever caught, generally blames the “unauthorized” activities of unsupervised employees, as shareholders invariably learn too late of hundreds of millions of dollars put at risk without their knowledge. Recent examples such as Kidder Peabody and Orange Cty. in the U.S., Barings Bank in the United Kingdom, Codelco in Chile and several Chinese traders on the London Metal Exchange (LME) represent only the tip of the iceberg. Elsewhere, the metals investment climate is unusually fraught with dangers unrelated to normal business activity.

Governments are increasingly erratic and unstable, with the threat to their trade and credit ratings being the only prod to their setting realistic tax, finance and currency policies.

Responding to the concerns of angry citizens’ groups, Washington is seriously studying measures designed to reduce spending and balance the budget. And the born-again Mexican government has promised to mind its financial house in the future.

In Canada, the federal government did not officially raise personal taxes in its recent budget. Rather, it has promised to make severe cuts during the next three years while immediately imposing taxes and temporary surtaxes on companies of all sizes.

The budget buys time for the dollar but does not bode well for the domestic economy, which now finds itself strangled by these cavalier levies. Metals-related sectors such as automobiles, airplanes, hotels, transport and tourism are bound to suffer some distortion as a result. The beneficiaries will be lower-cost competitors elsewhere in the jurisdiction of the North American Free Trade Agreement, where energy taxes are not used so heavy-handedly to subsidize non-travel-and-transport industries. As for physical demand, it is digging, melting and welding as usual. Most miners and refiners are reported operating at capacity. And in metals manufacturing, order books are full and delivery lead times extend for months in some cases. Until recently, consumer sectors were also spending at ever-healthier rates. Ominously, however, the latest round of interest rate increases was led by the U.S.

In the base metals sector, generally heavy selling in February and early March overshadowed news of the slow but gradual decline in all exchange inventories.

The following average prices and inventories of the LME pertain to February, with the previous month’s figures shown in parentheses (unless stated otherwise).

Sustained long and short selling by all market segments caused nickel to plunge to US$3.86 (US$4.35) per lb. Inventories fell again on Feb. 28, to 132,558 tonnes (compared with 148,080 tonnes at the end of January), and daily spot prices hit US$3.24 before bouncing.

Three factors — rising production outside Africa, steady demand, and problems with other metals — eased cobalt free-market quotes for Western A Grade to US$29.50 (US$30) per lb.

Fear of slowdowns in the auto battery sector influenced lead prices, which declined to US26.3 cents (US30.2 cents) per lb., as stocks fell to 312,350 (328,750) tonnes.

Declines in the construction and auto sectors also eased zinc prices, which fell to US46.8 cents (US52.5 cents) per lb. as stocks were reduced to 1.1 million (1.2 million) tonnes.

Ignoring healthy fundamentals, the combination of inventories on the LME and the Commodity Exchange of New York fell again, to 297,500 (327,288) tonnes, as copper held near its high at US$1.30 (US$1.36) per lb.

News of U.S. producer plans to resurrect shuttered capacity, combined with a continued scarcity of spot consumers, kept molybdenum oxide spot price quotes around the US$15-per-lb. level (unchanged from January).

Precious metals were all softer in fairly quiet markets. Currency woes, low central bank sales and a lack of investor attention (due to high real interest rates) kept gold flat at US$376.75 (US$378.75) per oz. Partially influenced by faltering base metals, spot silver prices fell US15 cents on Feb. 28. They were helped along by the exquisitely timed news release that a major publisher was switching one application to a non-silver alternative. While the average price for February fell to only US$4.72 (US$4.77) per oz., spot prices in early March were lower, at US$4.44. Good autocatalyst numbers outside North America, combined with a strong yen (which encouraged investment), kept the platinum group metals steady, as the platinum price edged up

to US$414.19 (US$413.64)

per oz. and palladium improved slightly to US$157.05 (US$156.01) per oz. However, these two metals weakened slightly in early March, again due to the malaise in base metals. Still under supply pressure, rhodium sank to US$500 (US$610) per oz.

Converter manufacturers and auto companies now have technology in place to switch the combinations of these catalyst metals to attain economic combinations.

Given a continued strong physical market and declining inventories, we would expect prices for a significant number of metals to improve in the short-to-medium term. However, this forecast is based on the assumption that there will be no significant increases in interest rates, which continue to be the key to sustained consumer and investment activities.

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