EDITORIAL PAGE — Post-Cold War blues

The dissolution of the Soviet Union brought with it an end to the Cold War. This was cause for celebration around the world. However, few people could have predicted the severe consequences such a development would have on the metals markets.

Within the non-ferrous metals sector, large tonnages of cut-rate aluminum, nickel, copper, zinc and lead have hit Western markets in the past three years from the Commonwealth of Independent States (CIS), in particular from Russia. The impact was pronounced, as the West suffered through a recession. According to Metal Bulletin Monthly, Russia alone exported 1.4 million tonnes of non-ferrous metals in 1992. Among the individual metals, aluminum exports from the CIS accounted for 7.2% of the Western world aluminum market in 1992. (It accounted for 1.2% in 1988.)

The share of the nickel market grew to almost 20% from 10.5%. In the zinc market, the region was once a net importer; it now supplies almost 3% of the Western market, the magazine reports.

All this has caused misery among Canadian producers, such as Inco, Cominco, Alcan, Noranda and so on, as metal prices deteriorated. To cite a few examples:

* Because of oversupply, Western world mine production of lead fell 11% in 1993 and zinc output fell 9%. This has severely affected Cominco’s financial performance and resulted in layoffs at Brunswick Mining and Smelting. * Inco was forced to cut nickel production by 16%.

* The aluminum market has been hit hardest of all, and to stem the outflow of Russian aluminum, the European Community imposed import quotas. * In the uranium market, the dismantling of nuclear warheads remains a threat to the supply-demand equation.

Thanks to several factors, the outflow of metals seems to be abating. However, we are now hearing reports that Russia has been dabbling in the diamond market. News reports out of England quote a De Beers director as saying that between US$40 million and US$80 million worth of uncut gem diamonds have been sold to Antwerp dealers from Russia’s state treasury stockpile. This breach of an agreement with De Beers, which was to sell all Russia’s gem-quality diamonds, did not affect the market. Last year, for example, De Beers sold a record US$4.4 billion worth of diamonds, 28% better than a year ago.

Nevertheless, the incident raises questions about the continuing ability of the Central Selling Organization (CSO) to control the market. Will the Russians fall into line again or will they continue, presumably in utter desperation for hard currency, to dump diamonds?

De Beers’ CSO controls roughly 80% of the world’s gem diamonds. It spends about US$160 million annually convincing consumers that diamonds are rare and therefore valuable. However, the CSO likely has a stockpile that, were it liquidated, would choke the market, collapsing diamond prices. We’re rather attached, philosophically, to the word “free,” as in free market and free enterprise. And we are aware the CSO’s stranglehold makes the world diamond market anything but free. In spite of this, we are concerned that a weakening CSO might affect the developing diamond situation in the Northwest Territories.

The CSO does not need — indeed, probably cannot withstand — another Angola. (In 1992, the De Beers agency spent $750 million swallowing diamonds mined in Angola, a rebel among diamond-producing nations.) So it must fervently hope the Russian gem sale was a one-shot deal. If not, the havoc in the non-ferrous sector will be duplicated in what has been for decades the very lucrative diamond market.