Lead was the only base metal on the London Metal Exchange (LME) to register an improvement in prices during the report period July 9-13. The average cash price moved up 3.3%, while the rest of the base metals complex continued to trend downward. Nearby spread tightness failed to support copper, the cash quote of which fell 0.7%. Aluminum was harder-hit, however, falling 1.1%, whereas zinc and nickel slipped 0.8% and 0.5% respectively.
Significantly, lead‘s fundamentals are among the strongest in the base metals complex. Inventory is low and the supply side tightly constrained by a shortage of concentrate. If solid fundamentals are at last beginning to bear fruit with respect to lead prices, mightn’t they also in other parts of the base metals complex? For example, some of the same factors that underpin lead’s fundamentals can be seen in aluminum, and also, to a lesser extent, in copper, but with global demand conditions still deteriorating it is probably too early to say that we have seen the lows just yet in either of those two markets. Zinc and nickel, with much weaker fundamentals, almost certainly have farther to go on the downside. Without the rest of the base metals complex to keep it company, lead is unlikely to be able to sustain its price rally. However, sooner or later, fundamentals will re-assert their influence, and this view was widely reflected in the mid-year surveys of analysts’ price forecasts recently published by various wire services. The consensus is that there will be a moderate recovery from current price levels in the second half of this year, accelerating in early 2002.
Copper prices continued to trend downward, with the LME 3-month figure failing in a brief attempt to climb above the 10-day moving average at US$1,570 per tonne, before closing, on July 13, at a new low of US$1,554 per tonne for the current cycle. The potentially bullish impact of a strong rebound in U.S. stock markets late in the report period was negated by big increases in LME stocks. Meanwhile, tightness in nearby spreads is persisting, and further big LME stock increases are likely. In the short term, we expect support at US$1,550 per tonne to come under further pressure. Although speculators are already holding large short positions, volumes are so low that relatively small amounts of selling will be enough to push down prices. A test of the upside is much less probable and, if it does take place, is likely to fizzle out at around US$1,580 per tonne.
LME copper stocks rose 47,000 tonnes and are now 130,000 tonnes higher than their low point in mid-June. Although most the increase has been in U.S. warehouses, there has been a substantial increase in European warehouses and in Singapore as well, indicating weak copper demand in almost all major consuming regions.
The International Copper Study Group reported a global surplus of 158,000 tonnes for the January-April period. By comparison, CRU International and Brook Hunt estimate surpluses of 150,000 and 161,000 tonnes, respectively, for the whole of the first half of 2001. On the basis of these figures, it appears the copper market has been in substantial surplus so far this year. But have movements in visible stock levels reflected this? During the first half of the year, LME stocks climbed by just 90,000 tonnes, indicating a possible build-up in “invisible” inventory of around 70,000 tonnes. If these estimates are anywhere near accurate, there is considerable potential for further large deliveries of metal into LME warehouses over the short term.
Despite the climb in copper stocks and continued deterioration in the global economic outlook, most analysts still expect copper prices to improve significantly in the second half of the year. The recent Dow Jones survey of metals market analysts showed average quarterly price forecasts of US$1,675 and US$1,650 per tonne for the third and fourth quarters, respectively, compared with our own forecasts of US$1,600 and US$1,700 per tonne.
Aluminum prices remained locked in a narrow trading range for most of the report period — US$1,450 per tonne at the bottom end, reflecting the lowest price levels seen in almost 15 months. Evidence of a slowdown in the rate of U.S. fabricated product order declines and further falls in LME stocks (minus 9,000 tonnes during the report period) are failing to boost market sentiment, partly because of news of smelter restarts. Traded volumes continue to contract, but there is forward-buying interest from consumers just below the market. We therefore expect support in the mid-US$1,400-per-tonne region to hold for the time being.
There is growing evidence that the dramatic pace of decline in shipments of aluminum products in the U.S. is slowing. Data from the Aluminum Association show that orders in June fell by just 11% year-over-year, the smallest such decline since June 2000. With stocks of finished products in key consuming sectors, such as autos, back at more normal levels, we expect order levels for aluminum products to continue to improve, particularly since we are now moving into the period when, a year ago, orders began weakening. But although de-stocking may be coming to an end, there is still not much sign of any significant pick-up in underlying demand. The big auto companies are cautious about prospects going forward, particularly since the reduction in stocks has been achieved by unprecedented cuts in model prices. The next two months are unlikely to show much improvement in car sales, and attention is now focused on September, traditionally a strong month for the car industry.
Zinc prices slipped to a new life-of-contract low of US$866 per tonne on July 13 as the steady descent in prices continued. Given the poor state of demand, lack of producer response to lower prices and the steady rise in LME stocks (a 5,000-tonne increase during the report period, and 10,000 tonnes since the beginning of June), further price declines look inevitable.
Despite the low prices, there are no indications yet of any mine production cuts in the West. Consequently, the concentrates market remains well-supplied with material. This situation is unlikely to change in the short term, particularly with the ramp-up to full production at the massive Antamina mine in Peru. The mine recently made its first shipment of copper concentrate; zinc shipments will soon follow. However, full annual capacity of around 280,000 tonnes of zinc and more than 300,000 tonnes of copper is expected to be reached by December, two months ahead of schedule. The mine will be the world’s third-largest producer of zinc.
The trading area of US$5,950-6,100 per tonne kept nickel prices neatly range-bound despite attempts to test resistance at US$6,100 per tonne earlier in the week and support at US$5,950 per tonne at the end of the period. With consumer buying activity slack, the driving seat has been taken by funds, and it is now the actions of the speculative community that govern price direction. Aluminum fund activity has been placing downward pressure on prices for some time. With fund activity now heavily influencing nickel, prices could conceivably experience similar pressures. The close on July 13 just above support and at the bottom of a 2-week-old trading range suggests that the emphasis on nickel may be returning to the downside. If this is the case, US$5,800 per tonne will be the next target level.
The factors that favour a downward shift in price are beginning to outweigh the factors that had lent support. The fundamentals of nickel remain unsupportive, particularly as the market enters a seasonally quiet time of the year. The lack of consumer activity and scale of the decline in manufacturing sectors also weaken the market outlook. A generally soft base metals complex weakens nickel’s price support levels while increases in production are set to contribute to increasingly large market surpluses. The technical aspects of the market suggest downward price moves may be staggered and areas of support more protected.
Gold prices ended the week as they started
it — in dull and listless trading with lethargic price movements and low volumes. The US$265-per-oz. line remains the critical area of support. The lack of movement in prices last week reflects the uncertainty that is still governing participants’ actions. On the upside, prices failed to respond to a brief rally following the Bank of England gold auction, a weaker U.S. dollar and poorly performing U.S. equity markets earlier in the week. Equally, on the downside, prices did not respond to further lease rate moves below 100 basis points in the lending market, weak demand news from Japan and Taiwan, a lacklustre gold auction, deteriorating technical indicators and the downside risks from a still net long speculative position. The result was a week-over-week rise in price of just US40 by the July 13 close in London.
— The opinions presented are solely the author’s and do not necessarily represent those of the Barclays group.
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