Global Metals

Deutsche Morgan Grenfell Research

Deutsche Metal Window

20 October 1997
METAL PRICES

-----------------------% change ------------------

LME 3-month 17/10/97 10/10/97 Week Qtr to Yr to YoY 1996 1996
prices date date High Low
Copper (c/lb) 95.8 95.0 +0.8 -1.0 -2.6 +8.8 118.3 93.1
Aluminium (c/lb) 73.9 74.6 -0.9 -0.8 +4.8 +19.9 80.5 69.5
Nickel (c/lb) 295.7 295.5 +0.1 -5.1 -1.1 -7.6 377.6 288.9
Lead (c/lb) 27.6 28.0 -1.3 -5.2 -13.8 -15.2 33.1 27.0
Zinc (c/lb) 58.9 59.6 -1.2 -3.8 +22.3 +27.4 75.8 47.8
Tin (c/lb) 252.5 256.1 -1.4 -1.6 -4.3 -6.8 278.1 240.4

Gold ($/oz) 324.4 330.2 -1.8 -2.5 -11.6 -14.7 368.0 313.6
Silver ($/oz) 4.96 5.21 -4.8 -4.8 +4.4 +0.8 5.37 4.24
Platinum ($/oz) 424.5 432.0 -1.7 -2.6 +15.0 +10.5 497.0 348.3

LME INVENTORIES

(t) Copper Aluminium Lead Zinc Nickel Tin

17/10/97 338,625 742,950 119,675 458,250 64,560 10,520
Chg +575 -1,300 -350 +75 +372 +245

Chg last week -2,850 +3,675 -525 +13,650 +2,424 -230

End 1996 125,350 951,275 118,600 506,825 48,900 10,610

Chg in 1997 +213,275 -208,325 +1,075 -48,575 +15,660 -90

COPPER RALLY FAILS TO MAINTAIN MOMENTUM

n Trading in base metals perked up last week after the previous week’s subdued state, when
activity was depressed by the LME dinner, with a significant increase in volumes amost
contracts. In the flagship copper sentiment began to turn more positive as the recent period
of unrelenting increases in LME stocks came to an end - inventories declined by 2,850t last
week. Prices rallied to a recent high of $2,150/t (97.5c/lb). However, the lack of any significant
follow through buying and increased producer selling led the rally to reverse, with the market
closing on Friday at $2,111/t (95.8c/lb) for a modest gain of $17/t. In the zinc market further
sizable deliveries of material into LME warehouses in Singapore depressed sentiment, with
the market shedding $16/t on the week to close at $1,298/t (58.9c/lb). By contrast the nickel
market ignored an apparent acceleration in the rate of stock accumulation in LME warehouses
- inventories increased by 2,424t last week after rises of 1,100t and 402t in the previous two
weeks - with prices closing the week little changed. News of a production stoppage at the
Nedehzdinsky plant in Russia helped to support the market.

n Gold and silver prices came under pressure last week. Gold prices shed $5.80/oz as increased Alan Williamson
alan.williamson@aus.deuba.com
producer selling and last week’s US CPI data (which ponted to low inflation) allowed the bears
Tel (44171) 545 8249
to gain the upper hand. Meanwhile silver prices also softened, partly on the subdued outlook Fax (44171) 545 1788
for inflation but also as the gold/silver ratio was becoming increasingly stretched. Silver
prices closed the week at $4.96/oz, down 25c/oz.
Deutsche Morgan Grenfell
Securities Australia Limited
ACN 003 204 368

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Deutsche Metal Window Deutsche Morgan Grenfell

TOTAL STOCKS-CONSUMPTION RATIOS (WEEKS)

Copper Aluminium Lead Zinc Nickel Tin

End 1994 4.8 12.2 6.7 14.6 15.7 14.1

End 1995 4.5 8.8 4.6 9.6 10.0 9.6

End 1996 3.3 9.0 4.3 7.8 9.8 8.5
Present 3.6 7.8 4.4 6.7 9.6 7.7
End 1997F 3.6 7.1 4.2 6.1 9.2 7.7
End 1998F 3.3 5.8 4.0 4.7 8.1 6.5
Historic critical levels
3.5 6.5 5.0 5.5 8.5 6.0

ZINC - RISING CHINESE EXPORTS PUTTING FURTHER PRESSURE ON

SENTIMENT
n Zinc prices drifted lower last week, with LME 3-month prices closing at $1,298/t (58.9c/lb), down Zinc prices weaker
$16/t on the week. Although the market received some initial support from reports that despite Asarco
workers at Asarco’s Tennessee mines, which together produce around 60,000tpa of zinc-in- strike
concentrates, had rejected a tentative labour agreement and had gone on strike, this was more
Sentiment
than offset by the depressing effects of further increases in LME inventories. Stocks increased depressed by
by 13,650t last week, after rising by around 4-6,000tpw in the previous three weeks. rising LME stocks

n As a result, LME inventories now stand at 458,250t, up by almost 80,000t since the beginning of Much of the rise
September. Much of the recent deliveries have been made into LME warehouses in Singapore has been in
as the Chinese attempt to cover the remaining short positions by shipping physical metal - Singapore as
Chinese shorts
stocks in the city state have increased by around 35,000t in the last six weeks. However,
deliver
weaker Asian demand and the backwardation which was in place for much of September have
also allowed producers in Europe and North America to deposit spare material in exchange
warehouses.

n Total Chinese exports of refined zinc this year are now expected to be around 430,000t, more Chinese exports to
than double the 1996 level. As a result, total net Eastern bloc exports are forecast to be total 430,000t in
700,000t, up from 450-470,000t which the market has recorded over the last two years. As a 1997
proportion of WW supply, net Eastern bloc exports are expected to be 11.2% this year, up from
Eastern bloc =
7.9% last year. Indeed, as recently as 1989 the Eastern bloc was actually a net importer of zinc! 11.2% WW supply

Net Eastern bloc exports of refined zinc

’000 tonnes %
750 12

650
10
550
8
450

350 6

250
4
150
2
50

-50 0
1990 1991 1992 1993 1994 1995 1996 1997
Other Eastern bloc (LHS) China (LHS) % WW supply (RHS)

n Indeed, the depressing effect of the rise in Eastern bloc exports on the zinc market has Rise in Eastern
arguably been greater than for any other base metal. The following chart shows the share of bloc exports
despressed metal

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total WW supplies accounted for by exports from the Eastern bloc. As can be seen most prices in early 90s
metals saw a surge in imports in the early 1990s as the collapse in domestic consumption and
the need to earn hard currency encouraged the shipment of metal from the CIS and Eastern
Most exports have
Europe. However, since 1994 the share of total supplies accounted for by Eastern bloc exports
now stabilised
has remained broadly flat for most metals (true they have yet to decline as most analysts have
been expecting) - with the exception of zinc which has increased further this year. Despite the
surge in Chinese exports, the zinc market is still expected to register a deficit of 180,000t this But zinc continues
year, with a further deficit of 160,000t for 1998. This should take total stocks below critical to increase !
levels by the middle of next year. Between now and then, continued volatility in prices can be
expected.

Share of WW metal supply accounted for by net Eastern bloc exports

% WW supply
24
21
18
15
12
9
6
3
0
-3
Copper Lead Aluminium Zinc Nickel
1989 1994 1997

COPPER
n The copper market had something of a roller coaster ride last week. Having started the week Copper prices end
at $2,085/t (94.6c/lb), prices came under some early selling pressure before rallying to a high of higher, boosted by
$2,150/t (97.5c/lb) on Thursday, partly in respsonse to an earthquake in Chile. Although there Chile earthquake
...
was little actual disruption to production, with stocks of copper still at critically low levels the
earthquake did serve to highlight how vulnerable the market is to any supply disruption.
However, producer forward selling and the lack of any significant follow through buying
caused prices to retreat, with prices ending the week at $2,111/t (95.8c/lb) for a modest gain of
$17/t.

n Sentiment benefitted from a fall in LME inventories last week - down 2,850t. Although clearly it ... and by declines
is too early to call a reversal in the recent, almost uninterrupted, increase in LME inventories, in LME stocks
the stock movements over the last week and a half do at least suggest that LME inventories are
stabilising. Much of the stock drawdown in the last few days has been from LME warehouses
in Singapore, indicative of good buying interest from China, and also higher demand from
other Asian consumers forced to look to the LME following recent delays to shipments from
Chile - the latter clearly demonstrating how thin current consumer inventories are. Moreover,
with many trade players currently running short trading books, the potential for a sharp short-
covering rally in prices remains in place.

n Some more thoughts on Asian copper demand. Much has been made about the potential loss Weakness in
to demand caused by a prolonged economic downturn in the ASEAN region (even though the ASEAN but
jury remains out on whether such a downturn will occur). However, very little has been strength in the
Middle East !
mentioned about the current strength of copper demand in the Middle East and India, and in
particular the Gulf States. Last year offtake in Saudi Arabia (160,000t), India (127,000t) Turkey
(144,000t), Iran (54,000t) and the rest of the Middle East (20,000t) totalled just over 500,000t of
refined copper - slightly higher than that of the ASEAN region (486,000t). While the outlook for
the ASEAN region remains uncertain, offtake in the Middle East remains very strong, as
infrastructure spending delayed since the Gulf War is finally undertaken. As a result, demand

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for telecommunications and power cable is reported to be very strong indeed. With offtake in
Taiwan and South Korea still very good, sweeping statements about the “weakness in Asian
demand” are, at best, clearly misleading!

NICKEL
n Meanwhile the nickel market ignored further increases in LME inventories, with the LME 3-
month price closing little changed on the week at $6,520/t ($2.96/lb). Total LME inventories
now stand at a massive 64,560t. Moreover, the rate of stock accumulation shows no signs of
slowing, even though end-use demand remains firm. Indeed, if anything, the rate of stock rise
seems to be accelerating - stocks of nickel increased by 2,424t last week, compared with almost
1,100t for the whole of last week and just 402 in the previous week.

n The catalyst to the rise in prices last week were reports of production disruptions at the Further reports of
Nadezhdinsky plant in Russia. Two stories published in the TASS newspaper suggested that production cuts at
one of the furnaces at the plant would be closed for 5-6 months. If true this would lead to a Norilsk
loss in production of around 15-20,000t of primary nickel - and switch what is currently a
market in balance (or at worst a small surplus) into a decisive deficit. However, the reality is
not nearly so bullish - the stoppage is part of a routine maintenance programme and
production will be unaffected.

PRECIOUS METALS
n Gold and silver prices came under pressure last week. Gold prices shed $5.80/oz as increased Gold and silver
producer selling and last week’s US CPI data (which ponted to low inflation) allowed the bears lower on subdued
to gain the upper hand. Meanwhile silver prices also softened, partly on the subdued outlook inflation
for inflation but also as the gold/silver ratio was becoming increasingly stretched. Historically
a gold/silver ratio of below 70 has proven difficult to maintain and the recent rally in silver
prices - from below $4.50/oz in mid-August to $5.20/oz as recently as last week - had taken the
ratio down to around 63. Indeed, even after the sell-off at the end of last week, with prices
closing the week at $4.96/oz, the ratio is still an uncomfortably low 65.

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