Base metal consumption falls

The extent to which the world has changed since the events of Sept. 11 was made more clear when the base metals industry gathered for LME Week (Oct. 22-26), a major event in the metals calendar year. Before the terrorist attacks, market-watchers were expecting discussions to centre around the emerging signs of global economic recovery and the prospect for higher prices in the year ahead. Now the agenda is very different. A much smaller gathering than usual will focus on plummeting global consumption levels and the need for production cutbacks and consolidation.

The markets delivered their verdict at the end of the report period Oct. 15-19. Copper, aluminum, zinc and nickel all fell sharply to record lows for the current cycle. The largest decline in business sentiment in Germany since 1973 darkened the mood and pushed down metals prices, as did a disappointing Philadelphia Fed index. Unless significant production cuts are announced during LME Week, prices will almost certainly fall further.

Copper fell to a low of US$1,371 per tonne on Oct. 19, reflecting very light levels of selling in an extremely thin market. With prices now back at the kind of levels that prompted substantial production cuts in early 1999, it’s conceivable that similar cuts could be announced during LME Week. However, industry costs have fallen significantly since 1999, and most producers are still covering cash costs. If announcements are not forthcoming, prices will continue trending down.

Aluminum prices also hit new lows for the current cycle, with the London Metal Exchange 3-month figure touching US$1,283 per tonne. Prices need to fall to at least US$1,150 per tonne before production cuts can be expected. On the other hand, this year has already seen the closure of 8% of global aluminum capacity, so further cuts are not required, and even on modest growth assumptions, the market should return to balance in 2002. However, that may not prevent commodity trading advisors from pushing prices gradually lower if copper continues to weaken.

Nickel was the LME’s worst performer during the run-up to LME week. The 3-month price shed US$840 per tonne and firmly re-established its position as the worst performer on the exchange this year, hitting a low of US$4,560 per tonne. Prices may still need to fall much further (toward the 1998 low of US$3,765 per tonne at least) before significant production cuts are made. However, with LME stocks still at relatively low levels, owing to stock building off-warrant, short-sellers will be nervous about extending their exposure too rapidly. After the speed of the recent decline, a period of consolidation at current levels is due.

Zinc prices continued to trend gradually lower, with the LME 3-month figure touching a new low of US$764 per tonne on Oct. 19. With 40% of the industry now losing cash and production cuts desperately needed to balance the market, we find ourselves in the curious position of reporting production increases rather than closures. Hindustan Zinc announced a 21,000-tonne increase in output to 169,000 tonnes for the financial year ending March 31, 2002. Meanwhile, Teck Cominco says it expects its 300,000-tonne-per-year Trail smelter to reach full capacity by month’s end.

The significant deterioration in gold prices was not surprising. The yellow metal’s lacklustre performance in the wake of the terrorist attacks of Sept. 11 have left it looking weak and vulnerable to fund liquidation. The net long fund position of the Comex division of the New York Mercantile Exchange experienced some liquidation on Oct. 18, though the main source of downward movement continues to be the poor level of physical buying.

The absence of consumer buying has left gold prices unsupported since the rise to the US$290s per oz. and has not come back into the market in sufficient volume since. One of the main drags on demand is the U.S. dollar, which, despite dire economic data, has remained firm and managed to regain its poise. In terms of its behaviour as a safe haven, gold has clearly performed badly. It is also noteworthy, however, that on the afternoon of Oct. 19, prices remained calm and in a narrow range, indicating that fears ahead of weekends are subsiding. The progress of the U.S. dollar, quiet consumer markets and diminishing fears all suggest that prices may soften further during LME Week.

The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.


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