A small gain in lead prices prevented yet another across the board sweep lower in London Metal Exchange (LME) cash prices during the period June 25-29 as the rest of the base metals complex continued to deteriorate. Nickel was once again the biggest loser as prices adjusted sharply back down following the April-May rally, with the LME cash price shedding almost 4%. Copper was the next biggest loser, at minus 1.5%, followed by zinc, at minus 1.1%, and aluminum, at minus 0.9%.
All the major traded metals saw big increases in stocks. In copper, at plus 26,500 tonnes, and nickel, at plus 2,000 tonnes, tight nearby spreads are an encouragement to deliver off-warrant metal to LME warehouses, but aluminum and zinc, where this incentive does not exist, also registered large net inflows, at plus 14,000 and plus 6,000 tonnes, respectively. The metals markets usually brace themselves for rising stocks in the Northern Hemisphere summer, when business levels are low, but the recent increases suggest summer has arrived a little earlier than usual this year. Although U.S. consumer confidence, house sales and durable goods orders are encouraging, there is little sign of a pickup in the industrial sector just yet. Consequently there is no offset to the rapid deterioration taking place in demand for metals in Europe and large parts of Asia. Expect big increases in LME stocks of all metals over the next two months or so, and weaker prices as a result.
Copper prices continued to trend down, with the LME 3-month figure falling to a fresh low in the current cycle of US$1,563 per tonne on July 29, and there is little sign of a bottom being reached just yet. On the charts, copper is now in no-man’s land. The situation recalls mid-1999, when the LME 3-month price climbed rapidly to above US$1,700 from below US$1,400 per tonne in the space of just two weeks, with little time to establish benchmarks that could now act as price support. In the short term, US$1,550-1,560 per tonne looks as if it will be the first level of support, but if this gives way, a move down to the low US$1,500-per-tonne level may occur.
The stronger-than-expected U.S. economic data were enough to offset the impact on already-fragile market sentiment, reflecting a smaller-than-hoped-for rate cut by the Federal Reserve and poor Japanese data (in particular, record unemployment levels, falling prices and the seventh consecutive month of declines in construction orders). The net 27,000-tonne increase in LME stocks did little to help, though it was smaller than most had expected and was partially offset by a large, 10,500-tonne fall in copper stocks on the Shanghai Metals Exchange.
Aided by the emergence of tightness in nearby spreads the usual summer build-up in LME stocks appears to have started early, boosted in the U.S. by recent deliveries into the Long Beach and New Orleans warehouses (6,400 and 4,000 tonnes, respectively). A steady increase in stocks for the next eight weeks or so now looks likely, and this is certain to bear down hard on market sentiment.
At this juncture, the only thing that might raise the spirits of the market is a production cut. But this is unlikely to happen any time soon. Outside the U.S., the strength of the greenback is shielding all but a small number of the highest-cost producers from the full effects of the price downturn.
Within the U.S., the focus is on the southwest. Phelps Dodge still has WARN notices in place at its Tyrone and Chino operations until the end of July. It recently revised down its copper price forecast for 2001 by US5 per lb. to US75-80 per lb., but made no mention of possible cuts. Meanwhile, Grupo Mexico/Asarco remains locked in negotiations with unions at its southwestern operations, and little news has emerged of progress there, despite the expiry of labour contracts on June 30.
Aluminum prices gave support levels a thorough testing during the report period. In fact, the LME 3-month price on June 29 finally broke below the US$1,465-per-tonne level that had provided support for most of the week. Prices fell during an active early-morning session on June 29 when fund liquidation was the main factor driving prices down. Forward buying then came in to steady the market, taking prices back up to close at US$1,472 per tonne. Forward buying interest has been circulating in the market for some time now, without much business being done, because as the front end of the price curve has fallen, the contango has tended to widen, leaving forward prices little-changed. Of course, there is a limit on just how wide the contango can get (shaped principally by interest rates and storage costs), and, for this reason, prices are likely to continue finding good support from forward buying on dips in the LME 3-month price to below US$1,460 per tonne.
The LME 3-month zinc price fell US$900 per tonne, as it had been threatening to do for some time, hitting a low of US$889 per tonne on June 29, before recovering some lost ground to close at US$894. Zinc was not helped by softness elsewhere in the base metals complex, and the steady increase in LME stocks (up another 6,400 tonnes) is confirmation of the metal’s weak fundamentals. There is unlikely to be any let-up in either of these negative factors in the short term, so further falls in price appear probable, with a short-term target for the LME 3-month price of US$880 per tonne.
In North America, despite a shortfall in supply after recent cutbacks by local producers, the onset of the slower summer demand season has seen the physical market weaken. Midwest prompt premiums have fallen from more than US4 per lb. to under 3.5 per lb. currently.
Meanwhile, prospects in the Asian market are still poor. Although Singapore zinc stocks appear to have stabilized for the time being, at just over 108,000 tonnes, regional demand continues to contract. Japan’s Ministry of Economy, Trade and Industry says it expects zinc demand to fall by 3.9% in the current fiscal year.
Following a brief period of consolidation earlier in the week, nickel prices continued their downtrend. The bearish influences combined to usher 3-month prices sharply lower as weak fundamentals, renewed economic concerns and increased stocks pushed prices downwards through several key technical levels. Support at US$6,200 per tonne gave way on June 28 on the back of a softening base metals complex as copper, aluminum and zinc hit their lowest levels for the year so far. The sharp fall has left nickel looking for support at US$6,000 per tonne, the only positive factor being that prices have moved firmly into oversold territory and may be due for some consolidation. However, the probability of another move lower however is high as the quiet summer period begins and stock levels continue rise.
The 2,016-tonne increase in nickel stocks recorded during the report period takes LME inventories to their highest level since August 2000. The move above the 15,000-tonne mark comes just as nickel enters a seasonal downturn in demand and upturn in supply. Increasing levels of nickel production through mine expansions, combined with more reliable performances from Australian pressure-acid-leach plants, are reflected in stock levels, which have been climbing since the beginning of the year. During the second quarter, nickel stocks rose by 77%, climbing by almost 7,000 tonnes. Meanwhile, the reopening of the Russian port of Dudinka will ease supply flows to the West for the remainder of the year.
In quiet trading on June 29, gold prices were able to recuperate some of their earlier losses and return to the US$270-per-oz. area. However, this did not ameliorate a poor overall performance from the gold market. Reflecting disappointment at the size of the Fed rate cut on June 27, prices fell for two consecutive days, shedding almost US$10 per oz., eventually falling below US$268 per oz., their lowest level since early June. At the same time, renewed strength in the U.S. dollar and fresh falls in lease rates have further undermined prices. Renewed signs of gold’s fundamental weakness — ce
ntral bank sales and producer-selling — also emerged, reinforcing the view that upside potential remains limited during second half of 2001. Despite price weakness, U.S. funds continue to hold on to their long positions for the time being. The net speculative position on the Comex division of the New York Mercantile Exchange climbed to 22,000 lots on June 26, a gain of 3,000 lots on the week.
In what could prove to be a significant development, front-end lease rates have eased considerably. Higher levels of lending have reduced front-end lease rates to below their pre-rally levels. When lease rates spiked several weeks ago, one explanation was that a new bias in central bank lending was developing toward the longer-dated maturities and that the cap placed on lending by the Washington Agreement was causing a contraction in nearby liquidity. It was also suggested that this could encourage a big reduction in producer hedging, as erratic lease rates and a tight lending market persuaded previous hedgers against selling forward.
As a result, 1-month lease rates have fallen back toward the 100-basis-point mark. This should reduce nervousness and pave the way for an increase in hedging activity in the second half of the year. After recent price volatility, there is probably less inclination, on the part of speculators, to go short, but, overall, we expect the changes noted above to open the way for fresh downward pressure on gold prices in the months ahead.
— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.
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