An old friend, AMM; not a crack, I'm afraid.
Inventories falloff continues
Metals Outlook
Frederick R. Demler,
E D & F Man
July 6, 2000
Base Metals Commentary
Although the summer slowdown is well under way, inventories continue to decline across all the base metals.
Indeed, the global economy, despite some setbacks here and there, is still broadly in an expansion phase. Metal consumption both this year and next is expected to set new records backed by sound increases in offtake both in the West as well as in the East. Primary supply growth will also fall short of plan for a variety of reasons.
The low prices of the past two to three years has restrained development spending and also encouraged high grading. New technologies in nickel have yet to be fully worked out and high energy prices have led to cutbacks in aluminum and copper. There is also the unexpected but should-be-anticipated mechanical problem, geologic setback, and labor disruptions which have curtailed throughput.
This combination of favorable demand and lagging supply have resulted in deficit market balances. Moreover, consumption is expected to exceed demand through the end of 2000 and well into 2001 and the stocks-to-consumption ratios, already at or below equilibrium, will surely tighten.
Copper
Copper prices are holding steady, supported by further LME stock drawdowns (11,000 tonnes this week; 233,000 tonnes year to date, and canceled warrants at 100,000 tonnes), the Phelps Dodge Corp. Miami cutback (35 million pounds in 2000, 85 million pounds in 2001), and La Caridad technical problems (loss of 15,000 tonnes). Quebrada Blanca settled its strike but the production loss will exceed 5,000 tonnes.
Chilean production in May was also reported unchanged from a year ago despite the start-up of the 220,000-tonne Los Pelambres mine; output fell at Candaleria, Disputada, El Abra, Collahuasi, and Escondida.
The International Copper Study Group earlier projected an 80,000-tonne shortfall this year and a 300,000-tonne deficit in 2001. Given the recent consumption-production trends, the ICSG projected improvement might well fall short.
Technically, copper finds support at $1,765 and $1,725 a tonne; resistance is at $1,825 and $1,850 a tonne. The summer is usually a period of price weakness but we view any setback as a buying opportunity.
Aluminum
Aluminum has continued to firm and needs only to break above resistance above the $1,610-a-tonne region to trigger another round of fund buying.
The Londom Metal Exchange stock decline of 18,500 tonnes last week (255,000 tonnes year to date) combined with healthy shipments growth, modest production growth (up 200 tonnes per day in May, up 3.3 percent vs. year ago) and most importantly, the power-related cutbacks announced the past few weeks are all constructive.
Roughly 300,000 tonnes of annualized capacity has been idled at Kaiser Aluminum Corp. (128,000 tonnes, Mead and Tacoma), Ormet Corp. (7,000 tonnes per month), Vanalco (85,000 tonnes), Ravenswood (small), and Alcoa Inc. (Troutdale).
These cutbacks go a long way in offsetting the Alcoa/Alcan restarts and will keep global stocks declining through 2001 at least.
Support in aluminum is at $1,550 and $1,525 a tonne; the next target on the upside is at $1,650 a tonne.
Nickel
Nickel seems to be forming a bottom; it's about time after giving up $3,000 a tonne during the past month.
Some reports during the last few weeks have been less than positive: Cawse, the problematic Australian upstart is now operating at 94 percent of capacity, Dudinka plans to reopen following the seasonal flooding, Falconbridge Ltd. is optimistic of a settlement (although unions noted that the Inco Ltd. terms were problematic), and Taiwan and other Far Easy stainless cutbacks and U.S. stainless destocking have wilted buying.
Still, problems persist in Australia with Preston Resources Inc. moving its planned maintenance shutdown nearer and Murrin-Murrin still operating well behind plan.
LME stocks fell 1,400 tonnes during the week and are off 28,000 tonnes year to date and are now below 20,000 tonnes total. Moreover, canceled warrants remain high precursing further drawdowns.
The market is oversold and fundamentally, is critically tight. Nickel prices are undervalued. Support is at $7,500 and $6,700 a tonne; resistance is at $8,250 and $8,600 a tonne.
Lead & Zinc
Zinc and lead turned in strong performances during the week and both seem poised to move higher supported, in part, by further stock declines (1,300 tonnes in lead and 5,900 tonnes in zinc). In addition, Shenyang (in China) has been shut, Metaleurop announced plans to stop production at Harzer due to economic and environmental considerations, and Chinese exports have fallen sharply, off 19 percent year to date despite a 22-percent increase in production.
Indeed, internal demand is strong and could be absorbing part of the excess. To add, Westerm European premiums have firmed, the Far East remains steady, although domestically there has been some (seasonal) softening.
Technically, lead finds support at $430 and $420 a tonne; resistance is at $455 and $460 a tonne. Zinc support is at $1,150 and $1,130 a tonne; resistance is at $1,165 and $1,190 a tonne. |
