Another surge in nickel prices above US$15,000 per tonne in early July was too significant to escape action. Consumers withdrew their buying interest and excess material was delivered into LME warehouses against an attractive backwardation, while funds were active profit takers. A strong fundamental position is limiting the price fall, however, and a resilient nickel market is encouraging for all the base metals as it is often seen leading the complex.
Notwithstanding the risk of near-term technical selling pressure, fundamentals remain strong and continue to support high nickel prices. Nickel demand from the U.S. and European stainless steel businesses remains buoyant, highlighted by limited summer plant shutdowns and by positive comments on the outlook from several steel producers.
Other steel companies (
In China, a period of de-stocking is coming to an end, and we view a recent pick-up in Chinese nickel imports as very constructive. Despite the government’s tightening measures, China’s stainless melt output is expected to reach almost 2.5 million tonnes this year, compared with 1.8 million last year, which is likely to bring China’s primary nickel demand toward 80,000 tonnes over the same period, from 44,000 tonnes.
In response to high prices and stronger global growth, scrap availability has continued to improve and the scrap ratio at stainless-steel mills in the Western World can be expected to be considerably higher in the latter half of 2004 (at above 44% compared with 42.7% in the same period last year, according to industry consultant Brook Hunt).
Meanwhile, critically low global refined inventory levels are providing strong underlying support, leaving this market extremely vulnerable to any supply-side shocks. In light of this, an announcement from the world’s largest nickel producer,
The correction in nickel prices from multi-year highs in the first half of 2004 was followed by a period of weaker stainless steel prices. Underlying demand in Europe remains mixed, with some plants reporting no summer shutdowns due to strong demand, while others have seen a slowdown in order activity.
In Asia, stainless-steel prices have picked up of late in line with a rebound in Chinese domestic metal prices and higher freight rates, pointing at robust demand.
For most of this year, LME open interest and nickel prices have been moving in a reasonably close relationship, suggesting that the price decline through most of the first two quarters was driven by fund long liquidation. There was also evidence of short-selling, while open interest data suggest the more recent rebound in prices was helped by a combination of short-covering and fresh length.
Nickel remained the second-least actively traded metal on the LME in July, with only 237,900 lots traded, down a significant 20.3% month-over-month and 31.6% year-over-year. The gap between nickel and lead, the next most-actively traded metal, grew by 33,800 lots over July.
The reduction in nickel trading volumes on the LME is consistent with volatile and high prices.
Of late, price fluctuations have been most evident on nearby months, with far forward prices remarkably stable over the same period. As a result, cash prices saw a much larger decline than contracts for 12-27 months forward. This largely reflects, in our view, that prices were primarily driven by funds taking profits from more liquid nearby contracts.
Although the cash-to-three-month backwardation eased during August, it remains wide in a historical context (well above US$300 per tonne at the end of the month), highlighting that there is still limited availability for prompt nickel deliveries.
Physical nickel spot premiums in the U.S. continue their upward trend which has been in place for more than a year, reflecting low availability versus strong demand in the region.
Subdued European and Asian premiums, on the other hand, indicate that consumers can easily get material if required.
Although Holland and the U.K. have seen a few large deliveries of late (we assume of Russian origin), total LME nickel stocks remain extremely low, at about 10,000 tonnes at the end of August.
For most of this year, Rotterdam has been the largest holder of LME nickel, but in recent months its stockholding has fallen to the low levels seen in other locations.
Cancelled LME nickel warrants have fallen to only 350 tonnes, representing only about 4% of the total remaining stockpile. This suggests only small amounts of nickel are now awaiting outward delivery.
On a total reported basis (including stockpiles held at the LME, producers and consumers), nickel stocks stand at an estimated 140,000 tonnes.
According to the International Nickel Study Group (INSG), producer stocks were around 100,000 tonnes at the end of June.
Continued sharp falls in nickel inventories mean total stocks measured as weeks of consumption now stand at only 6.6 weeks, compared with the most recent peak of 10 weeks at the end of 2002.
A more positive trend in Chinese nickel trade has re-emerged, with July data showing net imports rose to 5,100 tonnes, representing the highest monthly figure since January. Encouragingly, gross imports were up, while exports were down, which we believe is a reflection that a period of de-stocking is now coming to an end. Still, the switch away from high-nickel-content stainless steel production is likely to continue to an extent as long as nickel prices remain close to multi-year highs.
INSG’s data show that growth in nickel-mine output remains subdued. In June, global nickel-mine output was lower both over the month (-0.8%) and compared with June last year (-0.1%), while in the first half of the year, mine output was up a modest 1.6% year-over-year.
However, despite this, total refined nickel production rose a hefty 11.4% year-over-year in June (and +0.2% month-over-month), which raised first-half refined production by 4.9% year-over-year.
Global refined consumption was 2.9% higher year-over-year in the first half of 2004, after a 2.1% year-over-year rise in June. This resulted in a modest 2,100-tonne, global refined-nickel deficit in the first half, according to the INSG, compared with a 14,000-tonne deficit in the same period last year.
Copper
Conflicting signals in the copper market have caused volatile trading conditions and a broadly sideways copper-price trend during the summer months.
Discouraging macro indicators continue to attract fund profit-taking at the top of the range while strong market-specific fundamentals are attracting buying on dips. After a period of Chinese consumer de-stocking since May, copper and other base metals are showing resilience and we believe there remain strong reasons to expect renewed upside price pressure through the latter half of 2004.
Chinese metal availability has tightened rapidly over the past month. A rebound in physical premiums and a surge in Shanghai copper prices above LME, coupled with producer reports of higher Chinese buying interest are firm evidence of a sounder physical Chinese copper market. Refined imports slowed sharply during May-July, while the State Reserve Bureau has stopped selling into the market but the underlying trend in demand remains strong. As a result, stocks held at bonded warehouses (non-custom cleared) have fallen significantly, from an estimated 400,000 tonnes in July to less than 100,000 tonnes by the end of August. However, some off-warrant material has also found its way to LME warehouses in Asia of late, leaving
the market nervous about further large deliveries.
Healthy growth in copper demand in the Western World supports our expectations for another push higher in copper prices through H2. Importantly, we highlight that when metal availability is tight and stocks are low (like now), prices can spike even if economic activity slows (the late 1980s is a good example of this). Even though leading demand indicators have started to turn down, manufacturing growth remains positive and prospects following the second-quarter soft spot are good, with modest business inventories and rising capital spending in the U.S. For copper in particular, the U.S. Copper and Brass Servicecenter Association reported another impressive rise in shipments in July, up 20% year-over-year, with positive outlook comments for the fourth quarter.
However, high prices are starting to have an impact on the supply side. Mine output is on the rise, evident in higher treatment and refining charges (TC/RCs), driven by strong performance at the world’s largest copper mines (Escondida and Grasberg) after severe production problems earlier in the year, and new output at
While this means the most acute copper-market tightness has certainly passed, unless there are other unforeseen production problems, we believe it will take time before the increased concentrates availability eases a very tight refined market.
Speculative fund length remains modest in the copper market. CFTC data for August suggests the net long fund position in the Comex copper market fell to only 3,000 contracts at one point, compared with last year’s peak of 48,000 contracts.
This means that if investors become more confident about the outlook, copper prices could receive an additional push from fresh fund buying.
Falling LME open interest and rising prices were a key feature in the copper market up to the April price peak, suggesting prices were driven higher by strong physical business rather than by speculators.
Then followed a period of fund long liquidation, with investors taking profits on a turnaround in several key leading indicators, suggesting slowing growth.
More lately, however, LME open interest has stabilized and started rising in line with the copper price, suggesting fresh long positions are being established, encouraged by strong market fundamentals and associated backwardation along the forward curve.
Copper remained the second-most heavily traded metal on the LME in July, with over 600,000 more lots traded than the third-most actively traded metal on the LME, zinc.
Some 1.38 million copper lots were traded on the LME in July, representing a fall of 4.7% month-over-month and 20.4% year-over-year, though trading interest still remained 57,000 lots higher compared to May, when volume reached its lowest since December 2002.
The current shape of the copper forward curve has remained remarkably stable over the past couple of months, partly reflecting subdued trading activity during the quieter summer months as well as extreme market uncertainty over the price outlook amid conflicting market signals.
Nonetheless, the whole curve is trading in backwardation, pointing at limited availability for near-term copper deliveries.
Physical copper premiums in the U.S. remain at high levels indicating strong demand and limited availability in the region, also evident from sharp inventory drawdowns.
Although Chinese premiums have been under sharp downward pressure during a period of de-stocking that started in the second quarter, there is now evidence of tightening domestic metal availability and a rebound in premiums.
In Europe, demand conditions remain relatively slack still, with demand primarily driven by external growth.
On the spot market, Chinese importers settled concentrate deals at TC/RC around US$95 per tonne and US9.5 per lb. in August, compared with US$65 and US6.5, respectively, in June.
Higher mine output is not yet reflected in refined production, and we expect continued tight refined market conditions through the end of the year as it will take time for the concentrates to come through to the metals market, especially as smelter inventories are running at very low levels still.
Despite recent large deliveries of copper into LME warehouses in Singapore and Korea (and speculation over more to come), total LME copper stocks remain extremely low, at about 110,000 tonnes at the end of August.
Copper stocks in the U.S. have fallen a significant 260,000 tonnes since the beginning of the year, with less than 100,000 tonnes left, while European LME copper stocks are largely depleted.
The high absolute level of cancelled LME copper warrants earlier in the year (150,000 tonnes or 43% of the total at the time) signalled the hefty drawdowns that were about to follow.
Although the absolute number of cancelled warrants are now understandably much lower, the current 16,000 tonnes cancelled still represent a significant 15% of the remaining total. This signals that, notwithstanding the potential for large deliveries from unreported locations, further outflows are scheduled over the nearer term.
In line with exchange stocks, total reported copper stockpiles (including inventories also at producers, consumers and merchants) had fallen to an estimated 1.05 million tonnes in August, approximately 730,000 tonnes below levels at the beginning of the year.
According to data collected by the International Copper Study Group (ICSG), stocks held at Western World consumers and producers stood at 175,000 tonnes and 650,000 tonnes, respectively, at the end of May.
Moreover, anecdotal data suggest refined copper stockpiles in bonded (non-custom-cleared) warehouses in China fell rapidly from an estimated 400,000 tonnes to below 100,000 tonnes during July and August.
We estimate total stocks measured as weeks of consumption now stand at only 5 weeks — the lowest since the thrid quarter of 2000.
This is less than half the recent peak of 10.3 weeks recorded in the second quarter of 2002 and in line with falling inventories and strong demand conditions.
Chinese trade data suggest that the period of consumer de-stocking that started in May continued through July. Chinese net imports of copper cathodes were only 46,000 tonnes in July, including a rise in gross exports (to 28,300 tonnes) and a fall in gross imports (to 74,100 tonnes). However, we expect tightening domestic availability will support a rise in imports again later this year, although importers are likely to take a more cautious approach compared with earlier this year. Imports of copper-in-concentrates, meanwhile, rose over the month to 292,000 tonnes, but were flat compared with July last year.
Despite a reduction in global refined copper usage in May, statistics from the ICSG show the global copper market was in a 610,000-tonne deficit from January to May, compared with a 282,000-tonne deficit in the same period last year. For May alone, however, the deficit was only 57,000 tonnes, the smallest this year.
Global copper usage was low in May, down 2.1% year-over-year, driven by the sharp reduction in Chinese copper imports; China’s apparent usage was 7.8% lower year-over-year in May. Still between January and May, global refined usage was 6.2% higher year-over-year, according to the ICSG. The large January-to-May deficit was supported by constrained production. Mine output was up only 0.6% year-over-year, while total refined output was a 0.5% higher over the same period.
Aluminum
Developments in China are the main focus, with demand prospects in the U.S. a further key determinant for aluminum prices through the latter half of 2002. Concerns on both fronts have risen over the summer months, but we believe these are overdone and see price dips as buying opportunities. Despite a slowdown in leading demand indicators, aluminum order books (notably in the U.S.) are looking strong, pointing to a high level of shipments in coming months. Japanese and European demand is also healthy, up an estimated 6% and 4%, respectively, year-over-year in the first seven m
onths of this year, compared with about +11% in the U.S. and 16% in China over the same period.
Against a strong background for demand, reflected in sharp inventory drawdowns in all major regions, physical premiums and prices have been boosted by lost production in Canada (22,000 tonnes per month at
Slowing growth in primary aluminum production is also an important feature in China (+15% in July compared with monthly average growth of more than 20% in the first half of 2004), resulting from the government’s efforts to reduce overcapacities, adverse operating conditions in the form of limited power supplies and a poor alumina/aluminum price ratio. Because of its electricity intensity, aluminum smelting is an industry that has been hit particularly hard by government restrictions, and also faced higher power price hikes compared to other industries when power rates were increased for the third time this year in June. The country’s aluminum smelters remain under severe financial stress as a result. All this, plus the proposed removal of the current 8% export tax rebate, is likely to continue to dampen China’s aluminum production and exports.
However, China’s power constraints are also affecting aluminum demand. There is a strong relationship between China’s electricity generation and manufacturing activity, meaning current power constraints also fall in line with the (desired) slowdown in industrial production. China’s auto production fell by about 20% in July, while sales were 2% higher over the same period. It is also true that regions with the worst power constraints have more aluminum fabrication than primary aluminum production. Still, the underlying trend in China’s aluminum consumption remains strongly positive.
Spot alumina prices (primarily due to reduced Chinese imports) fell to a recent low of about US$320 per tonne c.i.f. in July, that have recovered back towards US$390 per tonne c.i.f. during August.
The sharp reduction from the monthly average peak of US$480 per tonne in April coincided with heightened credit restrictions in China, which has had a dampening impact on primary aluminum production, and hence alumina demand. Domestic alumina stocks were also drawn during this period.
The correction in Chinese alumina import prices forced
For large parts of the past year, aluminum prices and LME open interest have been moving in the same direction. More lately, however, price strength has been accompanied by a sharp fall in open interest, suggesting short contracts have been covered as market participants have become more optimistic about the price outlook.
Aluminum remained the most actively traded metal on the LME in July. However, at 2.21 million lots, turnover has fallen to its lowest level since November last year in line with an increasingly cautious stance among market participants amid the relatively high price environment.
Trading volume of aluminum fell together with the rest of the base metals, albeit at a relatively smaller rate of 6.7% month-over-month and 4.5% year-over-year. The gap with copper, the next most-heavily traded metal, has fallen to 831,000 lots from 1.1 million lots in May.
Similarly to recent months, the aluminum forward curve remains in backwardation beyond the three-month contract.
Over the past month, the front end of the curve has shifted somewhat higher, partly reflecting renewed buying interest from funds of the more liquid contracts.
Physical aluminum premiums have firmed in most key aluminum-consuming regions. A more-recent rebound has been particularly notable in Japan, a region where fourth-quarter contract premiums are likely to settle close to 9-year highs towards US$100 per tonne.
U.S. premiums remain at high levels supported by ongoing reduced production at Alcoa’s Quebec operation, further strike threats and strong demand.
Although European premiums have also picked up, they remain muted partly because of the seasonal summer slowdown in demand.
The U.S. Aluminum Association’s widely watched order indices for July continue to suggest strong U.S. aluminum demand in the months ahead.
The total order index for net new mill aluminum products excluding highly seasonal can stock rose a further impressive 17.7% year-over-year in July, compared with +17.4% year-over-year in the previous month. The total index rose 14.4% year-over-year and was 15.3% higher year-to-date.
LME aluminum inventories have continued to decline in all major warehouse locations. Total LME aluminum stocks have been reduced by about 640,000 tonnes since the beginning of the year alone, or by 45%, to about 765,000 tonnes at the end of August.
The U.K. maintains the largest share of total LME aluminum holdings, while drawdowns have been the sharpest at Swedish warehouses.
LME aluminum stocks in Singapore fell below the 100,000-tonne mark in mid-August. In contrast, aluminum stocks at the Shanghai Futures Exchange rose to 150,000 tonnes in August, up 120,000 tonnes since the beginning of the year.
A particularly high level of LME cancelled aluminum warrants through July reflected future large inventory drawdowns. Cancelled warrants have remained substantial through the third quarter, above 100,000 tonnes (or about 14% of the total remaining), reflecting good prospects for further large LME inventory drawdowns over the nearer term.
Total reported Western World aluminum stockpiles (at exchanges and producers) had fallen to an estimated 2.87 million tonnes at the end of August, about 650,000 tonnes lower from the beginning of the year, owing to drawdowns at exchanges.
Stockpiles held at Western World smelters, as reported by the IAI, were largely flat over the same period, standing at 1.67 million tonnes at the end of July.
Based on our estimates for Western World consumption and reported inventories (at producers, consumers, merchants and exchanges), the aluminum stock-to-consumption ratio has finally started to show a meaningful move on the downside — now at 7.1 weeks, compared with the recent peak of 9.1 weeks in last year’s third quarter.
Chinese net aluminum exports were 33,200 tonnes in July. As expected, ahead of reduced export-tax rebates, this was the second-highest monthly figure this year, but year-to-date net exports are still well below last year’s (-23% at 160,000 tonnes).
China customs statistics also show alumina imports for July were 15% lower year-over-year at 522,000 tonnes due to high alumina prices and stock drawdowns.
The IAI reported daily average output fell to 61,300 tonnes in July, from 61,600 tonnes in June, due to lower production in North America. This compares with daily average output of 59,400 tonnes in July last year.
Total production for July amounted to 1.901 million tonnes, according to the IAI, which was 3.2% higher year-over-year, although representing slowing growth compared with average monthly growth of about 3.7% year-over-year during the first half of this year.
— 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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