Economic unease affecting metals

Several events affecting investment and metals markets appear to have entered a new phase of intensity.

Uneasiness in world financial markets is being felt in the metals sector, as investors begin to reforecast the timing of economic recovery in member nations of the Organization for Economic Co-operation and Development. It would seem the recovery in Europe and Japan, for example, may be delayed for another year.

Fears of further hikes in U.S. interest rates triggered a sharp fall in bond prices throughout world markets as some investors bailed out. In stocks, many individual investors and funds have moved to the sidelines, awaiting clarification and possible new direction.

While affirming their desire to suppress inflation, deficit-burdened governments — unable to tax further, yet reluctant to reduce existing taxes and increasingly nervous about the social unrest caused by persistently high unemployment levels — may be tempted to adopt policies of even more liberal spending.

The recent Group of Seven mini-meeting in Detroit, Mich., which was called to address the issue of unemployment, may signal future directions regarding payroll taxes and similar tolls. (It is interesting that this meeting took place in the U.S. which, except for Japan, has the least amount of socially engineered protection and the lowest unemployment.)

As in other industrial sectors, the pace of metals companies moving to streamline operations and conserve cash has picked up. With bankers increasingly nervous, non-core assets are being re-organized and sold. Meanwhile, share offerings for general business purposes, even by long-established companies, abound. An increase in the number of shutdowns would seem to demonstrate that producers are finally addressing the problem of rising stock levels.

Prices and inventories on the London Metal Exchange (LME) in March, to date, are given below, with February’s figures shown in parentheses. Amid good physical demand, but depressed by news that Inco is returning to full production this month, nickel prices fell to US$2.517 (US$2.643) per lb. Inventories continued their slow rise, reaching 133,986 (128,826) tonnes. It is worth noting that both Inco and Falconbridge have labor contracts due this summer. And in the U.S., certification restrictions have been lifted on Russian cathode, raising the possibility that more Russian output may be diverted to North American markets.

Falling output from Zaire and Zambia, combined with a decrease in Russian shipments, has failed to move cobalt consumers. Western brands continue to sit at US$22 (US$21) per lb., while Russian products hover around US$17-18 (US$18). In North America, inventory sales by the U.S. government are obviously helping to stabilize prices.

Emerging from the battery replacement season but supported by the announcement of further production cuts, lead prices eased slightly to US20.2cents (US22cents) per lb. as stocks increased again to 332,500 (330,775) tonnes.

Zinc stocks, on the other hand, surged to 1.1 million (1 million) tonnes as prices eased slightly to US42cents (US44cents) per lb. These stocks are at such heights that if every zinc producer in the world were to close shop for two months, inventories would return to only reasonable levels. Rising consumer demand, particularly in the U.S., kept copper ahead at US85.5cents (US84.7cents) per lb. as inventories on the LME and the Commodity Exchange of New York (Comex) declined again to 605,697 (653,314) tonnes. With world consumption in the range of 11-12 million tonnes, Comex stocks are at a healthy 40,219 tonnes, while those of the LME are at 537,475 tonnes. In quiet markets, molybdenum oxide prices are sitting at US$2.75-2.85 (US$2.80) per lb.

News that Japan will melt down and sell a hoard of gold coins and that some central banks continue to sell more gold, had the effect of depressing prices for the yellow metal. Nevertheless, interest rate fluctuations and consequent problems in the bond market slowed gold’s retreat. Prices eased to US$379.67 (US$381.66) per oz.

Supported by a study revealing a slip in production to 625 million oz. and a deficit of 141 million oz. between production and demand, silver maintained its bullish course, moving up to US$5.28 (US$5.25) per oz. (Falling production of zinc and lead at mines where silver is a byproduct is also affecting output of the precious metal.)

As buyers continue to take positions in preparation for the April 27 election in South Africa, platinum reached US$394.31 (US$393.68) per oz. Palladium was also ahead, at US$132.06 (US$131.74) per oz., though rhodium was down again, to US$725 (US$800) per oz.

— Jack Dupuis is a metals agent, broker and consultant specializing in the marketing of mining properties.