Copper
As demand indicators are improving, the focus is shifting more towards copper’s supply side and the potential for restart of idled capacity as prices rise.
In contrast to the other base metal markets, a key feature of the copper market during the past downturn has been the response from producers to demand and price conditions in the form of voluntary closures. Surely, when prices have surpassed US$1,800 per tonne and demand prospects are looking brighter, mining companies are intensifying discussions on reactivations. Restarts of idled capacity are one reason why copper prices are unlikely to surpass previous cyclical price peaks, at least on a more sustainable basis.
Partial capacity restarts have already been evident, most notably at
Imports to the world’s now-second-largest copper consumer, China, have continued at a strong pace. Throughout this year and even before, there have been ongoing talks about an imminent slowdown in Chinese consumption. Domestic inventory accumulation (both up and downstream) is certainly taking place, and the impact from a restructuring of the banking system should have negative implications for copper consumption growth rates. However, we still see no evidence of any marked slowdown, and fresh pressures on a Chinese currency revaluation could help offset any negative factors on international trade of refined metal. We expect Chinese copper demand growth of 14% this year and 10% next year (to 3.1 million tonnes).
Western demand is starting to show encouraging signs of improving, and stronger economic data are attracting additional length to the total Comex fund position. Data from the U.S. Copper & Brass Servicenter Association showed shipments of copper and alloy products rose 3.8%, year over year, in July, helped by a 7.5% rise in the largest volume category (brass sheets). Expecting a copper market in deficit and maintaining our overall positive price profile, we have made minor upward adjustments to our price forecasts for 2003-04.
The net long fund position in copper increased to record levels of 37,000 contracts in the week ending Sept. 9, representing at least seven consecutive weeks of a major speculative net long (around or above 30,000 contracts). A record net long, for a record period of time, poses near-term downside risk to the copper price, and a weaker technical picture could prompt a bout of system-based profit-taking. Such a scenario would provide an excellent opportunity to enter this market for market participants who want positive exposure to a cyclical upturn.
LME open interest for copper has risen to its highest since the price peak in February. The strong positive correlation between open interest and price suggests fresh buying has been behind the move higher in prices. In line with the Commodity Futures Trading Commission data on speculative activity on Comex, these data suggest copper could be vulnerable to near-term profit-taking.
Trading volume for copper followed the pattern set by aluminum, and fell off in the traditionally quiet month of August by 18.8%, month over month, though it showed a year-over-year increase of 33.3%. In spite of the traditional summer slowdown, this was the most active August for copper on the LME in the past five years, with some 1.4 million contracts traded during the month.
Some tightness has been evident in nearby dates, though not enough to convert the cash-to-3-month contango to a backwardation. While there have been signs of the whole forward curve flattening in recent months (signaling increased demand for spot material, and some forward selling), the whole curve has shifted higher over the same period. Current forward prices provide an attractive opportunity to lock in profits for a consumer, as we expect a price peak above US$1,900 per tonne towards the end of the fourth quarter of 2004, compared with current forward prices of below US$1,850 per tonne for the same period.
Physical premiums in Shanghai remain strong overall (around US$75-85 per tonne), though they have eased from the peak above US$100 per tonne seen earlier in the year. High Chinese premiums have attracted material to the region, with evidence of some inventory-build. While U.S. premiums are stable but firm, European premiums have continued to rise, indicating good demand for the metal available.
As LME copper prices continue to rise, some of the mine capacity currently idled is likely to restart in what is still a tight concentrates market.
As a result, treatment and refining charges (TC/RCs) are likely to pick up from all-time lows, with any up-trend set to accelerate during 2004 as more material becomes available, partly from Escondida, Phelps Dodge’s operations, Grasberg and Codelco. Spot TC/RCs stood at about US3.59 per lb. in August, slightly higher from the US3.08 per lb. registered during the second quarter.
Despite showing the first monthly rise in 18 months in August, the overall LME copper inventory trend is downwards. The small rise in August was due to deliveries into Baltimore, with the U.S. still holding the largest inventory position by a margin. The LME copper stockpile has been reduced by about 260,000 tonnes since the beginning of the year (or -40%) to 600,000 tonnes.
Although Comex copper stocks have declined along with LME inventories throughout this year (-73,000 tonnes), inventories in Shanghai are about 20,000 tonnes higher. As a result, exchange inventories have another 200,000 tonnes to fall before Codelco starts to release the material it is withholding from the market. In line with the declining inventory trend, total cancelled LME warrants have also been reduced, reflecting the fact that less material is now awaiting outward delivery (about 25,000 tonnes). The pace of the inventory decline might slow somewhat as a result over the near term.
Helped by falling exchange inventories, the total reported copper stockpile (producer, consumer, merchant and exchange) has fallen further below the 2-million-tonne mark in the third quarter. According to the latest data for June from the International Copper Study Group (ICSG), producer and consumer inventories stood at an estimated 625,000 tonnes and 180,000 tonnes, respectively.
Despite inventory drawdowns and improvements in demand, total inventories measured as weeks of consumption remain high. Based on total reported stocks, the stock-to-consumption ratio stood at an estimated 8.6 weeks in the third quarter. High inventories are constraining price increases. However, as long as inventory drawdowns continue, the price is at least likely to rise.
Official customs statistics show Chinese refined copper imports were strong in July, at 140,000 tonnes net (gross imports at 146,000 tonnes). This was the highest monthly figure in 11 months. Relatively firm premiums have certainly attracted material to the region, and some of this material is likely to be stockpiled. Still, large import volumes signal continuous strong domestic demand.
Supply and demand statistics from the ICSG show the global copper market was in a 271,000-tonne deficit in the first half of 2003, compared with a 219,000-tonne surplus in the same period a year earlier. However, the ICSG warned that seasonal factors have contributed substantially to the monthly trend in the supply-and-demand balance, which favours demand in the first half and supply in the second half. After adjustments for seasonal factors, the global copper market was largely balanced in the first half of 2003, according to the ICSG. Demand growth remains centred in the Asian region (China and Japan), while European and U.S. demand growth remained soft in the first half.
Nickel
Undoubtedly possessing the strongest supply and demand fundamentals among the base metals, nickel has also been the star-performer on the LME since the cyclical trough in the fourth quarter of 2001, as well as throughout this year. Traditionally a more volatile metal and with leading abilities, nickel prices have now reached their highest levels in almost 3.5 years and are close to previous cycle peak levels of US$10,460 per tonne.
Unlike the other base metals, nickel’s price peaks have not necessarily occurred at lower levels than in previous cycles, and there are reasons to believe nickel prices have further room on the upside on a spot basis because of unique positive fundamental aspects at this particular time, despite extensive fund length already in place.
Because of the strong nickel price environment, news stories focus on potential new supplies, and there have been a few announcements of smaller projects or expansion plans.
In the meantime, the effects from the strike at Inco’s Sudbury plant and availability at
The nickel market is a supply story at present, but the demand side also remains positive overall. European Arcelor has now confirmed it will not make additional cutbacks to stainless steel output in the fourth quarter (it cut 80,000 tonnes of production in the third quarter, owing to high inventories). While U.S. stainless steel demand was down 4%, year over year, in the first half of 2003, Chinese import demand of refined nickel continues to strengthen to support its stainless steel industry. Notable too is that any new scrap supplies are unlikely to reduce strong growth rates in demand for refined nickel at this point.
Pressure in nickel and stainless steel prices remain firmly on the upside. After a period of firm but flat stainless steel prices, Asian prices have started to trade higher, with no clear signs of strong infrastructure demand abating. High stainless steel inventories remain a concern in the Western World. However, we expect production curtailments at stainless steel mills in Europe and signs of improving demand conditions to continue to support prices.
After a period involving a strong positive correlation between LME open interest and prices, mid-September saw a sharp drop in LME open interest, while prices remained largely stable. The sharp drop in open interest is encouraging for it leaves room to establish fresh long positions, which will keep prices rising.
Trading volumes of nickel remained relatively firm in August, declining by just 5.3%, month over month, during the seasonally quiet period. Year over year, the volume of nickel traded increased by 41.2%, while the price continued to gain ground during the strike at Inco’s Sudbury operations.
The steep backwardation remains firmly in place, with prices for all forward dates trading at a higher level than in previous months. The structure of the forward curve continues to suggest tight conditions for this market, which are unlikely to ease over the nearer term. In fact, forward prices are currently close to our future price projections, which suggests producers should consider booking some forward sales.
The nearby (cash-to-3-month) spread returned to a backwardation towards the end of the first half of the year and has widened through the third quarter. The Inco strike exacerbated the lack of metal availability, which led to the nearby backwardation extending to US$150 per tonne at the end of August. However, in the aftermath of the release of the Norilsk Nickel consignment stock, the wide backwardation helped attract large quantities of metal into LME warehouses, which resulted in a narrower spread. Genuine market tightness in light of strong demand and little new supplies is likely to keep the backwardation in place for now.
Physical spot premiums in the U.S. have continued to rise strongly, reflecting both the Sudbury strike and robust stainless steel production in the region. European nickel premiums have also picked up a little lately, while stainless steel producers were reducing output in the third quarter. Physical premiums are set to remain firm while demand continues to outstrip supply.
LME nickel inventory movements have been extremely mixed between regions. Dutch warehouse locations have seen hefty inflows during the first part of September, with 8,900 tonnes delivered into Vlissingen and 7,700 tonnes delivered into Rotterdam during this period. Movements in Dutch warehouses most likely relate to Norilsk Nickel’s consignment stock, which was releasing during the first half of the year. As a result, the total LME stockpile has risen to 36,000 tonnes, representing the highest level since January 2000.
LME cancelled warrants are now substantially lower than the sharp spikes earlier this year (which coincided with substantial outflows). A low level of cancelled warrants has coincided with sizeable inflows reported during September. Still, another 1,000 tonnes are awaiting outward delivery. As demand for nickel remains strong and supplies are tight, LME inventories are likely to fall again.
Total reported nickel inventories stood at an estimated 160,000 tonnes at the end of the first half of 2003. This includes data for producer inventories, provided by the International Nickel Study Group (INSG), which estimated 87,100 tonnes at the end of June. While LME inventories have risen sharply during September, the total reported stockpile was around its lowest level since the early 1990s at the end of the first half (excluding the Norilsk Nickel consignment stock).
As inventories have generally been falling and demand has been robust, the total stockpile measured as weeks of consumption remains around its all-time lows of 7.0. Low metal availability and strong demand should maintain the stock-to-consumption ratio at around all-time lows for the foreseeable future.
Official statistics confirm that there is still strong import demand for refined nickel into China. July net imports were 4,964 tonnes, representing a level 93% higher than a year earlier. Net imports in the first seven months of the year climbed by 154%, year over year, to 38,500 tonnes. As domestic production is lagging demand severely, strong import volumes likely will continue.
Statistics from the INSG show that the global nickel market moved into an extensive deficit in June of 16,300 tonnes. After one month of strike action at Inco, refined production was sharply down in June (-8%, year over year, at 89,000 tonnes). At the same time, demand growth for refined nickel remained steady at +4.3%, year over year, to 105,300 tonnes. As a result, the market registered a 24,000-tonne deficit for the first half of 2003.
— 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. Queries may be submitted to the authors at kevin.norrish@barcap.com and ingrid.sternby@barcap.com
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