ODJ FOCUS: Base Metals To Resume Uptrend As Supply Shortages Worsen
By Andrea Hotter
London, April 21 (OsterDowJones) - The current short-term price weakness in the base metals had been widely anticipated, with a return to higher prices expected given the potential acute supply shortage facing the markets, industry players said Wednesday.
This is particularly true for lead, tin, nickel and copper, whose underlying supply/demand fundamentals show falling industry stocks and tight physical availability.
Market players said that raw materials, including scrap, concentrates, alumina, power and freight - remain in desperately short supply.
Scrap prices continue to rise, with fixed costs already relatively high principally because of their labor intensity. At the same time, however, a global shortage of scrap is facing many of the base metals, market players said.
At the same time, global exchange and industry inventories of the base metals are falling and have reached near critical levels for several of the metals.
This is particularly the case for tin, where London Metal Exchange inventories have shown the greatest decline in absolute terms and also as a percentage of total demand. Total exchange stocks of tin have fallen by over 40% since December 2003, taking inventories to 6,390 tons currently. The last time LME tin stocks were below 10,000 tons was January 2000.
Copper has closely followed this rate of stock decline, with total inventories down by a similar level since December 2003. LME copper stocks currently stand at 160,300 tons, although had registered their first rise in months earlier Wednesday, by 5,250 tons.
LME nickel stocks have also fallen by over 35% since December 2003, taking inventories to 14,334 tons Wednesday.
At the same time, the world's largest nickel producer, Russia's Norilsk Nickel will not have a stockpile of 70,000 t to throw at the market. Production from them in 2004 is expected to be 240,000 t.
Amid this backdrop, Canadian nickel producer Inco Limited said earlier Wednesday that nickel is set to remain strong because of the worsening market deficit.
According to Inco Chairman and Chief Executive Scott Hand, over the next few years actual nickel demand will be limited by available supply, as supply growth is not expected to rise significantly before Inco's Voisey's Bay and Goro projects come on-stream in 2006 and 2008.
Lead stocks are also at critical levels, down by over 30% since December 2003 at 72,750 tons currently (actually <67Kt). LME lead inventories had fallen by over 34,000 tons in the first two months of the year, although this rate of decline slowed in March to just over 2,100 tons.
"While the level of aluminum inventories provides some cushion for consumers, copper, nickel, iron ore, manganese and other related materials are not so easy to source on an immediate or nearby delivery basis and are able to command new price levels in this environment," said analyst John Meyer of Numis Securities Limited.
"One indication of the lack of available raw materials is the very low treatment and refining charges for certain commodities," he added.
According to Meyer, copper treatment and refining charges have even swung into negative territory for some shipments as smelters reduce their charges yet further.
"Producers are trying to fill the supply gap at these high price levels but are struggling with inflexibility of supply with many operations already running ahead of nameplate and capacity output," he added.
Market players said that in this context, the base metals look set to resume their uptrend in the coming weeks and months.
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Andrea Hotter, OsterDowJones, (4420) 79795740
ahotter@osterdowjones.com
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