COMMENTARY — Oversupply just won’t go away

Base metal markets remain seriously oversupplied and the situation is worsening. Inventories of metals, particularly on the London Metal Exchange, continue to climb relentlessly with new all-time inventory records being set every week for several of the metals.

Any hope producers or investors had that 1993 would see a reduction in metal market inventories must now be forgotten. The focus will now have to shift to 1994 for a possible turn.

The one thing that continues to worry us is the extreme complacency shown by the metal producers themselves. So far, Western world producers of most metals have continued to operate smelters flat out, maximizing production to minimize costs, with apparently no concern for the chronic deterioration of the global markets.

As the Commodity Research Unit stated in a recent comment on nickel, “The reasons for this ultimately suicidal inaction are partly understandable. Most producers have made great strides to reduce cash costs . . . prices would probably have to fall to below US$2 per lb. to force cuts.”

So far, the concentrate producers, not the metal producers, have felt the most pain. For example, at the current zinc price of just under US40 cents per lb., it is virtually impossible for any zinc concentrate producer in the world to make money, and several producers, such as Curragh, have closed. Eventually, the curtailment of concentrate production will force smelter closures, but this will take a long time.

What is also urgently needed is an increase in global economic growth. The outlook on this front remains poor. Growth in North America and Japan remains sluggish, while much of Europe remains in recession.

The recent demise of the strict constraints of the European monetary system will enable individual countries to pursue more lenient monetary policies, but this will not happen quickly.

On a global basis, 1994 should be a better year economically than 1993 has been, but it seems likely that the inventory overhang will, at best, take several years to be eliminated.

— Analyst John Lydall of First Marathon Securities, writing in a recent issue of “Metals & Mining Digest.”