METALS COMMENTARY — Base metals continue to advance

Markets opened the year in good shape, with base metal prices, in particular, continuing to inch upwards.

The metal price upsurge reflects burgeoning demand by consumers in most markets. Europe and Japan are growing steadily healthier while the U.S. appears to be moderating slightly.

Many North American industries are now beginning their busiest season, which stretches through to June. Others, such as the auto sector, are entering a testing time during which the bulk of sales shift from leasing contracts to the public, whose members are much more sensitive to rising interest rates. Metals investors will be closely watching cars and housing indicators for the next few weeks.

Going almost unnoticed is the rising rate of competitive devaluations occurring among many countries. Mexico is the latest to falter; right up to the last moment, bankers and investment advisers (many of whom are owned by banks) claimed there was no cause for concern. A few more of these crises and investors may again decide that gold and silver are safer than such public assurances.

In Canada, the continued reluctance of many government sectors to act to reduce spending is creating an uneasy atmosphere and affecting normal currency flows. Until positive action is taken to curb government spending across the board, foreign earnings are more likely to be held in their original currency and only reluctantly converted to Canadian dollars. Meanwhile, customer acceptance will be tested this month as manufacturers face serious surcharges on many metal products. Most metal manufacturers and fabricators have been unable to obtain any forward commitments on wrought metal since early December, 1994. In many cases, quotes are only good for acceptance on the same day.

On a more positive note, base metals markets continue to attract investor interest, and producers are increasingly willing to hold vast quantities of inventory. Tight scrap availability, surging prices and a growing reluctance to sell forward characterize recent offerings.

The following prices and inventories of the London Metal Exchange (LME) are for the first week of January, with December averages shown in parentheses. Extremely strong sales and a lack of information on falling Russian production pushed nickel to US$4.07 (US$3.88) per lb. as inventories steadied at 148,422 (148,080) tonnes.

Tightness in supply, the fact that available inventory is in strong hands, and slower-than-expected sales from the U.S. national stockpile are holding cobalt free-market quotes for Western A Grades at US$29.50 per lb. (unchanged from December). Russian material is priced at about US$27.50. Strength in the auto numbers means that demand is good in the magnetic sector and improving in superalloys. Some major consumers were reported to be uncovered in the second quarter and are currently buying only as needed.

Falling stocks and a busy battery season kept lead trading narrowly at US29.7 cents (28.8 cents) per lb. as stocks fell again to 337,700 (343,425) tonnes. Brisk sales of galvanized steel underpinned zinc at US51.5 cents (50.6 cents) per lb. as stocks slipped again to 1.18 million (1.19 million) tonnes. The combination of inventories on the LME and the Commodity Exchange of New York rose to 335,843 (326,795) tonnes as copper consolidated near its recent high at US$1.34 (US$1.35) per lb.

Supported by shortages, producer allocation, and the ever-growing steel appetite for molybdenum oxide, spot price quotes for moly swelled to about US$20 (US$15) per lb. Producers are expected to sell to their contract customers in the US$10-to-$12 range this month.

Rising copper production should add to the availability of moly during the next few years. In the short term, however, only the primary producers (mostly in the U.S.) can increase production substantially and quickly enough to take advantage of the sharply rising prices. Demand is surging and is exceeding supply as inventories are thought to have declined to normal 3-month levels.

In spite of growing currency unease, gold dropped to US$376.66 (US$379.48) per oz. and silver settled to US$4.71 (US$4.78) per oz. Both precious metals have been building a massive sideways trading pattern for the past two years. Market-watchers grow uneasy every time the highs and lows are tested. The platinum group metals traded quietly, with platinum at US$408.47 (US$409.70) per

oz., palladium at US$155.11 (US$153.62) per oz. and rhodium again weaker at US$625 (US$655) per oz.

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