LONDON – Nearly everybody who is anybody in the base metals business anywhere in the world is in London for LME (London Metal Exchange) week. And for the first time for what seems a very long time, the mood this year will be decidedly upbeat.
Base metals prices are about 20 percent ahead of their level at last year’s LME week and seem set to go on rising as the prospects for a global economic recovery seem to be improving. This rosy outlook has not escaped the notice of the big speculative investment funds. They have been piling in to buy all sorts of commodities.
The impact has already been felt on the LME itself, the world’s biggest market for non-ferrous metals. Turnover is up by 20 percent in the first nine months compared with last year so that 2003 seems certain to beat the previous record set in 2000. And the bigger the turnover the more profit LME traders should make.
Robin Bhar, analyst at Standard Bank, reckons, however, it won’t be long before the indiscriminate headlong rush into commodities becomes more targeted and the funds begin to favour those base metals that have the best fundamental attractions.
Like many other metals analysts he suggests that, among the LME traded metals, copper and nickel have the best prospects, followed by tin, lead and zinc, with aluminium dragging along behind. Copper prices are already at their highest level for nearly three years and the speculative funds have not been so “long” of the metal for 16 years. As for nickel, the market is so convinced there will be supply shortages that the price is at a 13-year high.
Copper, used in wire and piping, and nickel, mainly used to make stainless steel, in particular are benefiting from the Chinese boom, Bhar points out. That country is importing huge tonnages of these metals. Copper has the best fundamental outlook, Bhar suggests, because, not only is demand picking up well, but producers are showing great discipline and not rushing to re-activate production temporarily shut down in the early 2000s when prices reached rock bottom.
The general feeling that “happy days might be here again” will do much to dispel any misgivings some LME week revellers might be harbouring about two separate investigations into parts of the base metals business.
The European Commission is gathering evidence to see whether there is any justification for claims that there is a cartel arrangement between producers of copper concentrate, an intermediate material in the metal production chain. Co-ordinated raids on most of the major producers were carried out by the EC, the US Department of Justice and the Canadian Competition Bureau in May.
No time limit has been set for the investigation and Bhar suggests, “it might take years.” J Steven Whisler, chairman of Phelps Dodge, the big US copper producer, who is guest of honour at the LME annual dinner, will almost certainly avoid touching on this issue on the advice of his lawyers. (The dinner, by the way, is always a sell-out event with all 1,200 tickets snapped up well in advance.)
Meanwhile, the LME has been carrying out an investigation of its own into its aluminium market. This inquiry was launched in August after a long period when reported aluminium stocks were high but the price was in backwardation – the jargon used when metal costs more for immediate delivery than for delivery in three months time. In normal circumstances the reverse should be the case because the cost of storing and insuring metal usually ensures that three-month metal is more expensive than that for immediate delivery.
Before the investigation was launched there were some complaints that the market was being squeezed by a big trading group holding much of the LME stock – as usual the fingers pointed at Glencore, the Swiss outfit that also owns a substantial stake in Xstrata.
The LME’s announcement that it had started its investigation immediately had some impact on the market, aluminium was easier to get hold of and the backwardation disappeared. But recently it has crept back again. Traders say this is because much of the stock is actually not readily available because it is tied up in financing deals.
Standard Bank’s Bhar will have a chance to comment on this situation – if he is so inclined – because he is one of several analysts pontificating at an LME curtain-raising seminar. The analysts will attempt to provide a comprehensive view of what is in store for the LME traded metals. Along with Bhar, Andrew Keen of CRU International, will cover zinc and lead, Ingrid Sternby of Barclays Capital, will deal with copper, Martin Frewings of Mitsui Busan, tin and nickel, while the UK Institute of Directors’ chief economist, Graham Leach, will give his views on the global economic outlook. Once again, all 250 available places for the seminar have been taken.
The amazing thing is that, in spite of the prodigious intake of alcohol and late night revelry that is always a feature of LME week, traders still put in an appearance during their working day – which for a few of them includes sessions in one of the few “open outcry” markets left in the world, the LME “ring.” But you can be confident that base metals trading will be very lacklustre this week. Don’t expect much price volatility.
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