The following is the third in a series devoted to metals markets and was culled from Barclays Capital’s monthly report The Commodity Refiner. This week’s instalment examines developments in copper, lead and aluminum.
Copper
Supply-side developments enabled copper to have a positive start to the new year. Despite a highly uncertain demand environment, we forecast a substantial market deficit this year, derived from disciplined producer action over the past 18 months, together with some involuntary production losses.
Deliberate reductions of available material from BHP Billiton and Codelco (Corporacion Nacional del Cobre de Chile) set the scene. Grupo Mexico’s announcement of a partial closure of its Mission mine (and the subsequent loss of smelter and refined output), together with the more recent strike action, has further raised the floor for the copper price.
Given Grupo Mexico’s financial woes and past experiences with labour disputes, we do not rule out a substantial loss in output as a result of strike action at its 150,000-tonne-per-year Cananea mine in Sonora state (a mine closure has been threatened, as well).
A tight concentrates market (and the company’s lack of cash) restricts the sourcing of raw material for its La Caridad smelter from elsewhere. Concerns over a strike at Norilsk Nickel, which produces about 450,000 tonnes copper per year, have also supported prices. However, we do not think management will allow a lengthy dispute, and so a negative impact on annual output is unlikely.
However, given the disappointing Western World macroeconomic data of late and the growing likelihood of war with Iraq, speculative funds are likely to remain cautious in the near term. On the other hand, the shift of consumption towards Asia provides some reason to be upbeat. Monthly import volumes of refined copper into China are impressive, and local market players are building long positions. We also believe the the State Reserve Bureau is continuing to accumulate stockpiles to support strong domestic demand.
Against this backdrop, we expect the global deficit to deepen in 2003 and 2004. But as is evident from our price predictions, we do not see prices rising to previous peak levels. The expected release of withheld material in Chile, once Exchange stockpiles are down to appropriate levels, is partly indicative of this. Meanwhile, the pressure on the concentrates market should ease this year, which is likely to push up treatment and refining charges, at least a little, from long-term lows.
Trading statistics from the Commodity Futures Trading Commission (CFTC) show that the speculative net long on the Comex stood at 15,000 lots at mid-January on the back of a combination of fresh longs and short-covering.
Fund exposure to copper is still below recent peaks, suggesting that there is potential for fund positions to be extended. This should support a continuation of the recent trend that has seen prices rise.
Despite subdued Western World consumption growth, we believe developments on the supply side give sufficient reason to have long exposure to this market.
Copper futures open interest has remained relatively high, though it was somewhat reduced during the last months of 2002. Prices were trending higher at that time, largely driven by speculative short-covering. The latest monthly data show total futures open interest for copper stood at 199,000 lots in December 2002, which was 0.5% below the previous month.
In January, open interest has risen again. Coupled with stronger prices, we believe fresh long-fund positions have been established. The CFTC data confirm this.
Copper futures trading volumes remained at relatively low levels in December 2002, though they were somewhat higher than in the previous month, totalling 1.3 million lots. That’s 7.1% higher than in the previous month, and 2% lower than in December 2001.
Copper was the second most actively traded metal on the London Metal Exchange (LME) after aluminum in December. The shape of the copper forward curve remained remarkably steady over January, though price levels for all future contracts were significantly higher than in previous months. The curve remains in full contango, indicating there is no fear of severe metal tightness over the coming 63 months.
Some forward-selling activity was evident in mid-January, with signs of European producers willing to take advantage of current forward prices.
Spot premiums have remained firm in most regions, and two recent key developments could have affected premiums. First, Codelco decided to withhold 200,000 tonnes of cathode, causing some concern that the market for quality cathode would tighten. Second, the free-trade agreement between Chile and the U.S. could increase the flow of metal between the countries, and hence create tightness elsewhere.
The concentrates market is still tight, and spot treatment and refining charges remain around their lowest in 15 years. However, as copper-in-concentrates output is on the rise, these are likely to pick up (though any rise is unlikely to be meaningful in the near term).
Little spot business has taken place recently. Kennecott has been the source of some (selling from its stockpile), possibly to Noranda and Falconbridge’s Horne smelter, in Rouyn-Noranda, Que., while the Antamina project, in Peru, has been another active market player.
Meanwhile, the Asian mating season is almost complete, while the European round is further from conclusion. The Los Pelambres mine, north of Santiago, Chile, and Highland Valley Copper, in British Columbia, settled at around the US$51-52 per tonne for smelting and US5.1-US5.2 per lb. for rfining level with Chinese smelters during the first half of January. Net inflows have remained modest during the first few weeks of the year, after declines dominated during the end of last year.
While U.S. inventories remain, by far, the largest (representing approximately 70% of the total), this is also where most of the recent drawdowns have taken place. In fact, total U.S. stocks are now 120,000 tonnes below the peak of April 2002 at 590,000 tonnes, while the total LME stockpile amounts to about 850,000 tonnes.
However, Comex copper stocks rose to record highs of 357,000 tonnes by the end of the year, which was more than 100,000 tonnes higher than a year earlier. In contrast, inventories at the Shanghai Futures Exchange have fallen by 170,000 tonnes since the peak of 246,000 tonnes registered in April 2002, helped by strong Asian demand.
Cancelled LME copper warrants have been reduced in line with declines in LME inventories in recent times. In November 2002, cancelled warrants represented about 7% (or 60,000 tonnes) of the total, and they have since halved to only 3.7% of the total (or 32,000 tonnes). This may signal that net drawdowns on the LME will be modest in the near future.
The net result for 2002 is that total Exchange inventories were 170,000 tonnes higher by the end of the year, and because the market is moving into deficit, we expect drawdowns during 2003.
Following a peak of 2.4 million tonnes in April, we estimate that the total reported copper stockpile had declined to about 2.2 million tonnes by the end of 2002. Movements in Exchange inventories were primarily responsible for the change; they represent about 60% of the total, or 1.3 million tonnes. However, with Codelco proposing the stockpiling of 200,000 tonnes, producer inventories will represent a large share of the total. Codelco is expected to release the material once Exchange stockpiles fall toward 800,000 tonnes.
While the copper stock-to-consumption ratio remains around historical highs, we estimate it was reduced a little by the end of the year to 9.9 weeks. We think it will be gradually reduced during 2003 (while the market moves into deficit and consumption picks up), which should have positive price implications.
Chinese net imports of refined copper reached record levels in 2002, representing a key positive in the copper market in a year of subdued growth in Wes
tern World demand. Customs statistics show monthly import levels averaged 100,000 tonnes during 2002, with total net imports reached 1.1 million tonnes. Part of this was the result of the State Reserve Bureau’s stockpiling of about 200,000 tonnes to support strong domestic demand growth.
However, according to data from the International Copper Study Group, apparent usage of refined copper in China moderated during October and was well down from the exceptionally high monthly levels in the third quarter. The global copper market registered a 62,000-tonne deficit in October 2002, which was the fourth consecutive monthly deficit, after surplus conditions over the same period in 2001. For the first 10 months of 2002, the global market was almost balanced at plus-6,000 tonnes, compared with a large surplus of 431,000 tonnes in the corresponding period of 2001.
In October, global usage rose by 6.6%, year over year, (and plus 3.9% month over month) to 1.3 million tonnes, while total refined output was 2.6% lower, year over year, at 1.29 million tonnes (but plus 2.6% month over month). Mine output was also lower over the year at 1.1 million tonnes in October (minus 1.2%, but plus 1.2% month over month), reflecting a tight market for raw material.
Lead
Downside risk in lead prices would appear to be restricted, with prevailing price levels providing good value. This is a result of positive developments on the supply side, as well as a pick-up in U.S. demand and physical premia. Falling export volumes from China, signaling strong domestic demand and a tight concentrates market, are also positive.
While demand has received a seasonal boost in light of the cold weather in the U.S. and Europe, the demand environment remains slow overall. Poor demand conditions were the prime reason for the closure of MIM Holdings’ subsidiary, Britannia Recycling, which produced 25,000 tonnes per year. However, the plant, situated in Wakefield, U.K., has recently been producing at the rate of only 13,000 tonnes per year, and the company will retain the lead scrap collecting point for onward shipment to the 35,000-tonne-per-year smelter at Northfeet, also in the United Kingdom.
Meanwhile, MIM is selling its Avonmouth smelter, in south-central England, which produces about 18,000 tonnes of lead bullion per year (the buyer is said to be U.S.-based Marco International). Owing to reduced shipments from Mt. Isa in Australia and uncertainty over the future of Avonmouth, output at Britannia Recycling’s Northfleet refinery could fall by as much as 70,000-80,000 tonnes, or 30%, this year.
Production at Porto Vesme, in Italy, is also at risk, depending on future power arrangements. The ISF plant produces about 35,000 tonnes of lead bullion annually, while the Kivcet smelter has an annual bullion capacity of 85,000 tonnes — all of which is refined at the 110,000-tonne-per-year San Gavino refinery, on the island of Sardinia.
Also, it now appears likely that Metaleurop’s Noyelles Godault operation will close because of high costs related to environmental pressures in France — a reflection of the fact that European operations are coming under increasing financial pressure because of the currency strength coupled with low metal prices. In contrast, Umicore High Purity Metal’s plant in Hoboken, Belgium, aims to increase lead output to 60,000 tonnes this year (11% higher than in 2002).
The concentrates market remains tight. Because of the lack of raw material and the closure of Boliden’s Laisvall mine, in Sweden, refined lead production at its Rnnskr smelter was sharply reduced in 2002 (minus 40% during the first nine months, to about 13,000 tonnes). Consequently, we expect a sizable reduction in the global supply surplus, with the Western World market likely moving into deficit for the first time since 2000. Indeed, the latest statistics from the International Lead and Zinc Study Group show that the global market registered a small deficit in November 2002.
Spot lead treatment charges remain around their lowest levels since mid-1995, at just below US$100 per tonne, reflecting a continuous tight raw material market for lead. While the Chinese continue to dominate the spot market for lead concentrates, long-term contracts are starting to be drawn up, led by the BHP Cannington mine in North Queensland, Australia, and the Lisheen mine in Ireland. It appears BHP has concluded terms for almost of all of its contracts, and the terms are less than US$10 per tonne lower than last year.
Chinese lead-in-concentrate imports were approximately 5% higher in 2002 at almost 400,000 tonnes.
Following evidence of aggressive short-selling of this market during 2002 (with prices and open interest falling simultaneously), more recent data indicate that some of these shorts have been covered. The latest monthly data show that total futures open interest for lead amounted to 47,000 lots in December 2002, compared with 55,000 lots at its peak in August.
Trading volumes of LME lead futures returned to more normal levels during the last month of 2002, following the spike in October. At year-end, volumes amounted to 280,000 lots, which was 33% higher from the previous month but 10% below volumes registered in December 2001. As a result, lead ranked number four in terms of trading volumes on the LME in December, with nickel and tin behind. On average, however, lead and nickel volumes tend to be similar.
While spot prices are little-changed from those traded a couple of months ago, forward prices far outside the curve have shown larger shifts, causing a small change in the shape of the curve. However, the whole curve remains in a contango, reflecting good metal availability over the coming 15 months.
Following some tightness evident in nearby spreads in December 2002, when the cash-to-3-month contango narrowed to only US$1.30 per tonne, the nearby spread has widened again to around US$10 per tonne.
Spot premiums have picked up a little in most regions, and European premiums have been supported by supply tightness on either output curtailments or production disruptions. Asian premiums have also edged higher following reduced refined output on concentrate tightness and strong Chinese demand, while U.S. premiums are up despite sharply rising LME inventories.
Inventories held at U.S. locations continued to rise at the end of 2002 and early this year, with net inflows at U.S. warehouses amounting to 97,300 tonnes in 2002. As a result, U.S. stockpiles now account for 65% of the total, compared with only 25% at the end of 2001. We believe this is the result of weak demand conditions and increased deliveries from Asia (diverted from Europe).
European market conditions remain tight, with LME inventories almost empty — only 14,000 tonnes at mid-January, most of which was in Italy. However, production losses at Porto Vesme, and possibly other operations, should help eliminate remaining stocks quickly and keep regional premiums firm.
Cancelled LME lead warrants have fallen to about 5% of the total remaining (or 9,000 tonnes) at mid-January, which is relatively lower than recent times. The current level of cancelled warrants suggests there are no sizable volumes due for outward delivery.
Total reported refined lead inventories stood at 496,000 tonnes at the end of 2002. That’s below the recent peak of 551,000 tonnes in May 2002. Drawdowns are evident at both producer and consumer levels, with stockpiles having fallen to 175,000 and 136,000 tonnes, respectively, according to the International Lead and Zinc Study Group.
We estimate that the stock-to-consumption ratio declined to five weeks at the end of 2002, compared with the recent peak of 5.3 weeks in the second quarter of 2002 — still well above levels recorded during the second half of the 1990s.
A reduction in Chinese export volumes of refined lead was helpful to the Western World’s lead market in 2002. Over the year, net refined exports amounted to 363,000 tonnes, which was 20% (or 70,000 tonnes) lower than in 2001.
However, in December 2002, net exports picked up somewhat, to 27,000 tonnes from 15,000 tonnes in Novembe
r, but were still a significant 21,000 tonnes lower than in December 2001.
We believe the domestic premium to the LME (due to strong domestic demand) has affected international metal flows.
The latest statistics from the International Lead and Zinc Study Group showed that the global lead market registered a 2,700-tonne deficit in November 2002, compared with surpluses of 13,500 tonnes in the previous month and 42,600 tonnes in November 2001. The deficit reflects a pick-up in global demand to 573,300 tonnes in November (plus 0.8% month over month, and 1% year over year), and follows six consecutive months of declines. Refined output declined to 534,600 tonnes (minus 2.2% month over month, and minus 7% year over year), helped by a tight concentrates market. Global mine output fell to 230,000 tonnes in November — minus 6.7% year over year, but a small increase of 1.9% month over month.
Aluminum
Currency- and power-related issues have combined to restrict downside pressure in aluminum markets, accounting for poor Western World demand and structural overcapacity. In fact, the LME aluminum price, denominated in euros, is trading at its lowest since mid-1999, providing an attractive opportunity for European consumers. At the same time, producers continue to take advantage of any rallies, which will likely prevent a sustained rally beyond US$1,400 per tonne.
From a fundamental point of view, there are several reasons to believe that upside potential is restricted in the immediate future. For one thing, order books in the U.S. are at their weakest levels since December 2001 when the LME price dipped to US$1,250 per tonne; hence, shipments over the coming months are likely to remain subdued, and demand conditions are no better in Europe or in Japan.
Also, even if there have been some reports of power-curtailed output loss (in Africa), the threat of any curtailment in output in Scandinavia now seems remote. Although Nordpool electricity prices remain high historically, they eased in January and now present little risk to metal output. The threat to primary output in Venezuela has also eased, and production at CVG Minerven is reportedly back to normal, notwithstanding the ongoing general strike. In contrast, Kaiser Aluminum reported further shutdowns at its Volcan smelter in Ghana, owing to reduced supply of hydroelectricity. The 200,000-tonne-per-year smelter now operates at only 40,000 tonnes per year.
A third factor: although Chinese output is estimated to have risen to 4.4 million tonnes in 2002 (a 41% increase from the previous year), there is no relief in the growth of Western World capacity. At the same time as Alcoa reported poor fourth-quarter results, it reiterated plans to build a new smelter in Iceland, which will be larger than previously announced. While production is not due to start until 2007, Western World producers are keen to defend their market share. Other increases in Western output are perhaps also indicative of a breakdown in producer discipline, which has been a key supportive feature to the copper market over the past year.
Against this backdrop, we still do not expect a collapse in the aluminum price. Apart from local currency strength and support from the rest of the complex, the factor that could restrict downside risk is the future availability of alumina. Concerns are mounting over the sufficiency of supply in light of sharply rising Chinese primary smelting output. Spot alumina prices have risen by approximately 50% since the fourth quarter, to US$215 per tonne on increased Chinese buying (the Chinese being the prime spot buyers) prior to their new year, which was celebrated at the end of January. Although we do not expect a global shortage of alumina, further gains in alumina prices could have negative effects on the profits of Chinese tolling arrangements and eventually lead to a reduction in Chinese export volumes of primary aluminum, which would be a positive development.
Alumina prices rose above US$200 per tonne in January, which is almost 50% higher than the recent trough in the fourth quarter. The rise is primarily due to strong buying from China. Iran and some of the Balkan smelters also purchase alumina on the spot market, though most smelters purchase only small amounts of spot alumina throughout the year. According to estimates by Brook Hunt, the spot market accounts for around 4.5-5% of the global metallurgical alumina market.
Recent strong gains in alumina prices are likely to hamper profits on Chinese tolling arrangements, and, as a result, further alumina price strength could eventually lead to a reduction in Chinese export volumes of primary aluminum, which, again, would be a positive development.
Following a sharp rise in futures open interest during 2002 (indicating short selling in a weak price environment), open interest has dropped markedly from its peak in October of last year. The fact that prices trended modestly higher during this period indicates that a great deal of short positions have been closed out by funds.
The latest monthly data show total futures open interest for aluminum stood at 356,000 lots in December 2002, which was 5% below its recent peak.
Aluminum futures trading volumes on the LME were further reduced in December 2002, totalling 1.6 million lots. This was a 20% reduction over the month and a 12% fall from the same month a year earlier. Aluminum remained the heaviest-traded metal on the LME in December.
The small backwardation remains for nearby months, while the shape of the curve has flattened further, compared with recent months. The evolution of the forward curve might be one reason for recent LME inventory outflows, while we believe some inventory financing deals have come to an end.
In the current price environment, we expect sizable producer selling interest above the market.
European merchant premiums are similar to those reported in December, with physical business remaining quiet. European consumers tend to stay on the sidelines in this uncertain macro environment, though some currency-related buying interest exists. Russian premiums, meanwhile, have received some support because of weather-related transport problems in the Baltic.
U.S. premiums have received support from tight scrap availability, as well as regional tightness in the primary market. Increased demand for scrap from China has added to the tightness in the secondary market, not only in the U.S. Japanese premiums have remained in an upward trend since the beginning of 2002, supported by strong Chinese demand. However, rising Chinese production and the diversion of more metal to the region are likely to prevent a continuation of this trend.
The latest indicator on U.S. aluminum demand suggests further near-term weakness in consumption, in line with recent mixed economic data and a highly uncertain macro environment. The U.S. Aluminum Association reported that its total net new-order aluminum mill product index fell to its lowest level since December 2001, at a time when aluminum prices declined to US$1,250 per tonne.
On a positive note, the total index improved, year over year, for the first time in six months, perhaps suggesting that the worst is behind. The index excluding highly seasonal can-stock data also dropped sharply from the previous month in December but registered the first year-over-year rise in four months.
Although total LME aluminum stocks remain at high levels (1.2 million tonnes), outflows have dominated the past few months. As of mid-January, LME inventories were 53,000 tonnes lower than at the beginning of November, with 14,000 tonnes delivered in 2003.
While outflows have been evident across regions, they have been most notable at Swedish warehouses; as a result, U.K. locations now represent the largest share of the total. We believe evolution of the forward curve is one reason behind outflows, while some financing deals might also have come to an end.
Cancelled LME aluminum warrants remain at high levels, with almost 100,000 tonnes (or 8.5% of the remaining total) awaiting outward shipment. Large amounts of metal on cancelled warrant
s suggest net inflows should remain constrained, preventing the LME aluminum stockpile from growing. In contrast, inventories at Nymex have been in a rising trend since July 2002 and are now at around 125,000 tonnes, whereas the Shanghai Futures Exchange’s stockpile is modest at around 10,000 tonnes.
The International Aluminum Institute reports that unwrought producer stocks rose to 1.6 million tonnes in November 2002, which was 23,000 tonnes higher than in the previous month, albeit still 148,000 tonnes lower than a year ago. In an environment of weak demand conditions, it was more surprising, in our view, to see a steady decline in producer stocks in the previous months. The November increase in producer inventories was matched by a 17,000-tonne drawdown in LME stocks, a 10,000-tonne increase on Nymex, and a 2,000-tonne decline in Shanghai, leaving the total reported change in November at plus 11,000 tonnes.
Total reported aluminum inventories represent about eight weeks of consumption. Given recent drawdowns in LME stocks and a pick-up in consumption from last year’s low levels, this is somewhat lower than the recent peak of 8.4 weeks registered in the first quarter of 2002.
Given the rise in world production and lacklustre demand growth, we believe aluminum inventories are likely to remain relatively high during 2003, which will prevent a meaningful reduction in the stock-to-consumption ratio.
China was a net exporter of primary aluminum throughout 2002, with monthly net exports ranging from 16,000 to 50,000 tonnes. For the full year, net exports amounted to 340,000 tonnes, with exports 110.5% higher than in 2001.
Meanwhile, the Chinese State Statistics Bureau reported domestic metal production figures for 2002. The largest rise in output among the base metals was registered for aluminum, at 4.4 million tonnes (plus 41%). In December alone, aluminum output had risen by 29%, year over year, to 455,000 tonnes. As a result, the country’s alumina imports have risen sharply, to 4.6 million tonnes in 2002 (plus 36.3%), while imports of scrap have also risen (plus 21.1%) at 447,000 tonnes.
Primary aluminum output in the Western World (excluding China and Russia) continues to rise. The latest statistics from the International Aluminum Institute show that daily average output rose another 0.4% month over month, or 5.7% year over year, in December to 59,300 tonnes, which is the highest on record. As a consequence, and in conjunction with sharply rising output in China and Russia, we expect the large global surplus to persist, at least during 2003-04.
Next week: Nickel, zinc and tin.
— The opinions presented are the author’s 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 Kevin Norrish, head of commodities research and energy, at kevin.norrish@barcap.com
Be the first to comment on "Downside risk restricted in lead and aluminum"