The report period Aug. 7-11 was one of contrasting fortunes for the base metals complex. Tighter nearby spreads and worryingly low stock levels contributed to stronger prices in the second half of the week for both zinc and nickel, but copper was once again unable to surpass the US$1,900-per-tonne resistance level, while aluminium prices weakened, moving to the bottom end of their recent trading range.
That aluminum is the weakest of the major traded metals at present is a little puzzling. Uncertainty continues to hang over large amounts of U.S. smelting capacity because of continued high power prices and because stocks are falling rapidly. The decline in London Metal Exchange (LME) stocks has been evident for many months now, but the recent fall in International Primary Aluminium Institute stocks confirms that inventory elsewhere is also on a downward track. Aluminum’s major obstacle to higher prices appears to be the weakness of the Euro, which is encouraging European producer selling and discouraging any European buying. The other base metals are less affected by the weak Euro, largely because of the low levels of production in Europe (in the case of copper and zinc), or because forward prices are unattractive (as is the case with nickel).
Unfortunately, for the aluminum market, there is little chance of any significant rally in the Euro so long as the U.S. continues to benefit from low inflationary growth, which, in turn, underpins the dollar. The recent release of productivity data for the second quarter (+5.3%) supports this view.
Yet again,
LME stocks have continued to fall at a rapid rate, though the daily rate of decline has slowed a little from an average of around 4,500 tonnes in late July to around 3,300 tonnes during the report period. At 69,750 tonnes, cancelled warrants are higher in copper than in any other metal, so the daily rate of decline is unlikely to go much below current levels. When, in early September, consumers in Europe return from holidays, LME stocks will be close to 400,000 tonnes, and, if the Euro has strengthened against the U.S. dollar in their absence, this could be enough to encourage some buying.
One of the reasons for copper’s inability to break through the US$1,900-per-tonne level is the small yet persistent bouts of producer hedging that continue to trickle into the market. This forward-selling means there has been little change in the scale of the backwardation since December 2000, despite copper’s having fallen from its high for the LME 3-month price on Aug 2. As a result of the backwardation, forward sellers can obtain a price of around 85 per lb. for the average of 2001. According to a recent poll of analysts, the average cash price forecast for next year is 90 per lb.
After falling below the psychologically important US$1,550-per-tonne level last week, the
LME stocks continued to fall, shedding 18,975 tonnes. Although cancelled warrants are also trending downward, they remain significant at 38,725 tonnes and a break below 400,000 tonnes for LME aluminum stocks now looks inevitable by the end of the month.
After the return to active trading in
No new talks are scheduled at Falconbridge. Both sides had expected talks to resume on Aug. 10 or 11, but this did not happen, and the local union president says the relationship between management and workers is at its worst in living memory. Falco’s declaration of force majeure at its Nikkelverk refinery in Norway, where copper deliveries will be cut to 1,600 from 2,600 tonnes per month, will not significantly affect shipments of nickel products, since the company has built up stockpiles that should last until the end of August.
Two other factors are keeping the nickel market on edge: a tightening in nearby spreads and a resumption in the LME stock decline. On Aug. 11, the cash-to-3-month backwardation widened to US$150-180 per tonne, following trading at US$90 per tonne on the previous day. Meanwhile, LME stocks, after climbing steadily for the past three weeks and gaining 1,140 tonnes since July 20, fell sharply on Aug. 10 and 11, shedding 432 tonnes. Movements in cancelled warrants have been a poor guide to future stock movements over the past few months, as they have been very erratic, falling to an all-time low of just 600 tonnes in late June before climbing back up to almost 4,000 tonnes early in the period under review.
With open interest for September call options at more than 5,000 lots, short-covering by options-grantors and by fund shorts dating from the previous price breakdown was the main reason for the momentum. LME zinc stocks edged closer toward the 200,000-tonne mark, shedding 2,775 tonnes. Market participants have been eyeing the low level of stocks for months, but there have been few reports of genuine physical tightness. However, during the report period, we heard several reports that material is becoming increasingly difficult to source — an indication that stocks may at last be approaching the critical level at which price spikes are likely.
Australian producer Sun Metals announced it would not be expanding capacity at its newly commissioned 170,000-tonne refinery at Townsville, Queensland. The expansion was widely expected and was part of a planned construction process, with the expansion being the second phase. The company stated that the expansion, which would double the plant’s capacity, was possible within a 5-to-10-year framework but not within the next five years. Weak demand in the recovering Asian economies was also cited as a reason for postponing the expansion.
Sun Metals is owned by Korea Zinc, which will see its production capacity in 2000 rise to 740,000 tonnes, or 8.6% of the world’s total. Korea Zinc plans to produce 342,000 tonnes zinc cathode at its 350,000-tonne-per-year Onsan refinery this year. In 1999, 319,000 tonnes were produced, and the hike in production has been attributed to growing local demand and higher Chinese import levels.
However, the world’s largest single consumer of gold, India, is providing little support for prices, and the September buying season is fast-approaching. Recent purchases of gold have been muted, and a delay in monsoon rains, which are crucial for successful harvests and agricultural incomes, is providing further uncertainty. Imports of gold through Ahmedabad, India’s largest importing centre, fell to 8.64 tonnes in June 2000, compared with 18.64 tonnes in the June 1999. Rural consumers are the most important buyers of gold in India, and the success of the harvest is crucial in determining rural income and levels of gold demand. Monsoons are forecast to arrive within 7-14 days, but recent rains have been weak and erratic in quantity, and there is some uncertaintity as to whether the harvest will be successful. Even if the rains do arrive, they will come at a time when the rupee is weak and falling — another factor that is casting doubt on the strength of Indian demand and how much support it will provide.
Figures released by the World Gold Council show a 2% fall in gold demand between the first quarter of 1999 and that of 2000 and a 0.6% fall between the first half of 1999 and that of 2000. Of particular interest is a 22% fall in demand for gold as an investment, which was in line with recent declines and data from the Commodity Futures Trading Commission showing historically low open interest in the yellow metal.
— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.
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