Rally surprises market

Metals prices climbed sharply higher in the week ended Dec. 17 as fund buying took the market by surprise, confounding widespread expectations that prices had settled into a phase of sedate range trading until the new year.

Base metal markets, in particular, appear to be pricing in the positive economic outlook for Europe and North America, which has become increasingly apparent with each new set of economic data.

Just how far this process will take prices is open to question. From a technical perspective, most markets appear to be in need of a period of consolidation. However, the moves that were made during the week ended Dec. 17 were on fairly low volumes. If other market participants decide to join the funds on their buying spree, the rally could continue.

After trading in a range of $1,740-1,770 per tonne for most of the previous two weeks, the London Metals Exchange’s (LME’s) 3-month copper price finally moved higher, reaching a 2-year peak of $1,846 per tonne. If this level can be convincingly overcome, a move to $1,900 per tonne could be imminent. However, with the upturn running out of steam toward the end of the week, consolidation in the $1,840-to-1,860-per-tonne region looks likely.

There is little about copper’s fundamentals that is likely to inspire a price rally any time soon; nonetheless, volumes did pick up in mid-December as prices rose. There was a particularly large volume of trading from one U.S. source, suggesting strong fund interest, and early December 1999 also saw increased evidence of copper oversupply. LME stocks rose 12,325 tonnes and Shanghai Futures Exchange stocks rose 7,703 tonnes. Further stock increases are expected to follow.

The major LME stock increase occurred in Bremen and New Orleans. The deliveries in Bremen are likely a consequence of the tightness that appeared in nearby forward copper quotes in early December, whereas the delivery to New Orleans is thought to be related to a producer-merchant offtake arrangement and could indicate further increases in that location. There are also rumours of recent substantial shipments to China (some of it to bonded warehouses), as well as large tonnages of consignment stocks now being held by merchants at consumers’ yards in Europe.

An interesting feature of copper is that it is one of the few metals now trading in long-term contango (although this forward premium is less than the full financing cost). The copper price rally in mid-December pushed values up along most of the forward curve, and prices available to forward sellers are now better than they were when spot prices were last at their current levels, back in September 1999. With producers generally under-hedged, prices could now be vulnerable to forward sales.

The LME 3-month aluminum price climbed to a fresh 2-year high of $1,617 per tonne in the week ended Dec. 17. The catalyst for the rise was fresh fears concerning alumina supplies caused by a rail strike in Western Australia that threatened to interrupt deliveries of bauxite and shipments of alumina from refineries there.

The strike proved shortlived, however, and aluminum prices have continued to rally. Falling LME stocks are also helping to support prices. LME inventory fell 10,600 tonnes in the week ended Dec. 17, following the previous week’s fall of 7,025 tonnes.

As with copper, a period of consolidation now appears likely within a range of $1,600-1,630 per tonne.

Unlike copper, aluminum’s price rise was not fully reflected in higher forward quotes. From March 2000 onward, the aluminum forward appears to be generally flat, owing to producer selling (and since September 1999, it has been trading in slight backwardation).

Nickel prices also surged to a new high in the week ended Dec. 17, hitting a 33-month peak of $8,315 per tonne. The LME stock draw slowed a little to just 48 tonnes, but LME stocks have fallen by 3,180 tonnes so far during the fourth quarter of 1999 — normally a time when stocks are climbing because of seasonal factors, such as slower demand and an increase in Russian exports.

Russian nickel exports showed their usual seasonal rebound in the third quarter, but about 30,000 tonnes of this material are being tightly held off-warrant in Rotterdam and are not available to the market at present. Premiums for Russian cathode in Rotterdam are firm at $0-20 per tonne.

The LME 3-month zinc price climbed to a 25-month high of $1,236 per tonne. There has, of late, been a lot of talk of zinc’s vulnerability to a squeeze, but the recent surge in price left the cash to three months contango intact, suggesting that if zinc is shaping up for a squeeze, it has not yet begun. From three months onward, the zinc market remains in steep backwardation, as has been the case for some time. As with the other metals, zinc now looks set for a phase of consolidation, though there are indications it could move higher early in 2000.

Squeeze theorists point to a high level of open interest in the early part of next year, combined with uncovered option positions at $1,175-$1,225 per tonne, a low level of industry stocks and concerns over the status of LME stocks in Trieste.

Balanced against all this is the likelihood of rising metal supply as smelter production expands and China’s zinc exports remain high. There remains some uncertainty over whether Chinese export levels will remain strong, as local consumption is showing signs of improvement. However, rising treatment and refining charges for smelters, combined with a recent increase in the zinc export rebate, suggests that the economic incentive to import will remain firm into 2000.

Precious metals are also ending the year on a strong note. Gold and silver have continued to climb from their early December lows, whilst palladium has hit an all-time high. Volume was low in all markets, but both silver and gold appear to be establishing new, higher trading ranges — gold, from $280-285 per oz. and silver, from just below $5.20-5.25 per oz.— The author is a minerals economist with Barclays Capital Mining & Metals Team, based in London, England. The views and opinions presented are solely those of the author and do not necessarily represent those of the Barclays Group.