After several weeks of supply-dominated news, base metals markets paused for breath during the period Jan. 29-Feb. 2. Meanwhile, the latest economic data refused to shed much light on the depth and extent of the global slowdown. Aluminum, at +2.7%, and lead, at +2.1%, were the only cash price gainers on the London Metal Exchange. The biggest loser was nickel, at -3.5%.
On the face of it, the steeper-than-expected fall in data released by the National Association of Purchasing Management, combined with low consumer confidence, suggests that the U.S. economy is indeed deteriorating. However, strong home sales and employment data in the second half of the report period helped counter the gloom, and opinion remains divided over how serious the slowdown will be. We still expect a recovery in the U.S. economy to become evident in the second quarter, after current inventory adjustments are complete. In Japan, industrial production was less strong than expected, though it is still trending upward, and car sales and housing starts are also in positive territory. Attention is now shifting to Europe, where several important data releases are scheduled. Meanwhile, the market remains wary of further production cuts, in particular at Phelps Dodge (copper) and at the Longview reduction plant of Reynolds metal (aluminum), in Washington state.
So far this year, stock movements are providing little evidence of any sharp fall-off in demand. Global exchange stocks fell 15,100 tonnes during the period under review, and the increase in global exchange stocks in December and January was modest by past standards.
The sharp rally in
After hitting a 14-week high of US$1,649 per tonne on Jan. 31, the LME 3-month aluminum price eventually succumbed to a barrage of poor U.S. economic data, falling back to end the report period just above the crucial US$1,600-per-tonne level. However, all of the factors that have supported aluminum’s recent price surge remain in place. Further U.S. supply cuts are possible in the short term, tight nearby spreads persist, and despite the extent of the backwardation, LME stocks are rising only slowly. Downside in the days ahead is limited, though longs may be disappointed if more cutback announcements are not forthcoming. Over the next week or so, we expect support at the US$1,580-1,600-per-tonne level to hold for the LME 3-month price. A break through this level could trigger a move back down to the range of US$1,540-1,560 per tonne.
Rumours suggest that Michigan Avenue Partners, the new owner of the 204,000-tonne-per-year Longview smelter in Washington state, is likely to cut production at the smelter by around 50%, bringing the total amount of lost production in the northwestern U.S. to more than 1 million tonnes.
Production cutbacks are now raising fears about metal availability. Although U.S. spot premiums remain fairly modest, at around 3.5 per lb., premiums for the second half of the year are being quoted at significantly higher levels of around 4.5-5 per lb. This reflects growing worries that, despite the economic slowdown in the U.S., metal could be in tight supply later on this year as the full impact of the recent production cuts feeds into the market. In an analysts’ briefing, Alcoa said it sensed fear amongst consumers that there was not enough metal to satisfy demand and that it therefore is projecting a market deficit this year. In other words, already-low inventory levels could fall even lower. Alcoa also said the tight power situation in the U.S. could persist for several years and that it may make further production cuts in that country’s northwestern region, where it still controls around 315,000 tonnes of production.
A quiet week for the
Demand is weak in several key markets, but supply disruptions are continuing to keep the nickel market tight. This was evident by the renewed tightness in nearby spreads during the report period. The cash-to-3-month backwardation widened back out to around US$300 per tonne, again following an easing to US$220 per tonne in the previous week.
There appears to be little sign of any settlement to the Falconbridge strike in Sudbury, Ont. The company says it is not prepared to compromise on the need to change work practices and reduce costs at the operation. Nickel production at Falco’s Nikkelverk refinery in Norway, which is dependent on Sudbury for its matte, fell to 58,700 tonnes in 2000, compared with 74,100 tonnes in 1999. Nikkelverk is currently operating at 60% of its 84,000-tonne-per-year capacity.
In addition, the availability of Russian nickel has been poor ever since the Noril’sk Mining and Mettalurgical Kombinat cut shipments last year, and, in recent weeks, Russian uncut has been trading at a small premium over LME cash, instead of the usual discount.
Finally, Centaur announced that nickel production at its Cawse plant, in Australia, had fallen to 1,401 tonnes in December 2000 from 1,855 tonnes in December 1999. The future of Cawse rests on Centaur’s finding a buyer for the operation, and several industry participants are understood to be looking at it with a view to purchase.
After re-establishing a trading range in the US$1,050-1,070-per-tonne area,
The more buoyant sentiment that has crept into the base metals complex is creating greater confidence in prices and prospects. Despite the lack of support from economic data, particularly from the U.S., aluminum was able to make significant gains; copper, too, was able to benefit; and nickel managed to bounce off earlier lows to reaffirm support in the US$6,600-per tonne area. Zinc, however, was the only base metal not to show any significant benefit from the improved sentiment. Prices held to the range established early in the report period (thanks mainly to thin trading rather than sustained buying), while the base metals complex headed higher. However, by the end of the week, 3-month prices were almost US$20 below the 10-day moving average and staring at a large technical gap in the price chart.
Consumption and production figures released by the International Lead and Zinc Study Group provide fundamental justification for the market’s suspicion of any gains zinc prices may make. Global production of refined zinc has been increasing gradually throughout the past 12 months, and during the second half of last year, it clearly outpaced consumption growth. In the 11 months to November 2000, global refined zinc output rose to 8.1 million tonnes, an increase over the previous year of 6.4%. While global consumption also increased, to 8 million tonnes, the rate of the increase was half the pace, at 3.3%. The data confirm our view that the market balance is heading for a sustained surplus over the next few years.
A clear trading range is beginning to emerge for
During the first half of the report period, prices staged a recovery that lifted them away from a precarious position just above the US$263-per-oz. support level. The recovery was fuelled by short covering in New York, which, by Feb. 1, had pushed prices slightly above US$268 per oz. Data from the Commodity Futures Trading Commission provide an explanation for both the rally and gold’s propensity to be at risk for sudden moves to the upside. The net speculative short position was the largest it had been since before the September 1999 Washington Agreement, under which the European banks agreed to limit gold sales. The tendency for speculative funds to take increasingly short positions on gold not only shows the deterioration in price expectations and sentiment that has taken place; it also leaves prices exposed to short covering rallies, such as the one witnessed during the report period.
Renewed weakness in the U.S. dollar and a resurgence in the fears over the state of the U.S. economy also provided some assistance to gold prices. The decision by the Federal Reserve to cut rates by a further 50 basis points brings the reduction in rates so far this year to 1%. Also, the decision contrasts with the policy stance of the European Central Bank to leave rates unchanged and thereby make the euro a more attractive bet. The rate decision followed the release of data from the Commerce Department showing that the rate of gross domestic product growth in fourth quarter was at its lowest in five years. The poor data weakened sentiment in the U.S. dollar and ended the gradual recovery it had been making against the euro, which, in turn, pushed the euro currency to key support levels at 0.92.
Despite the ability of gold prices to take advantage of these brief moves to the upside, our fundamental view remains unaffected. It takes more than a short covering rally in New York or a setback for the U.S. dollar to alter seriously the price outlook over the medium-to-long-term, which we believe to be firmly downward.
— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.
Be the first to comment on "Zinc sluggish as slowdown starts"