Metal prices headed for a `soft landing’ says bank economist

“The correction in metal prices over the next 18 months will be considerably less than in previous economic slowturns and prices will probably stay much higher and more profitable than in the mid- 1980s,” says Patricia Mohr, manager of the bank’s economics department.

Mohr was addressing a recent discussion group meeting of the Toronto branch of the Canadian Institute of Mining and Metallurgy.

World supply-demand conditions for most base metals will stay tight in 1989, Mohr predicts. A return to the higher first-quarter prices is not anticipated, however.

“Metal prices will decline moderately in 1990 as producers expand capacity — particularly for zinc and copper — and as a late-cycle rise in interest rates in the G7 countries cools demand in residential construction and in the auto sector,” she says. Peaked in January

Prices for metals have fallen from their January heights as short-term interest rates headed upwards. Mohr says investors have been moving out of speculative positions while U.S. manufacturers have cut back on metal inventories to minimal levels.

“Of equal importance to metal markets, capital spending surveys indicate the global boom in business investment will remain intact through 1990, though the pace of expansion will slow,” Mohr says.

Of special note is the recovery of capital spending in western Europe, after a weak performance during the first half of the 1980s. Plant and equipment is being improved in Europe prior to elimination of EEC non-tariff barriers to trade in 1992, she says.

In Japan, she says, manufacturers have been trying to counter the effects of a stronger yen by installing cost-cutting equipment and by diversifying into higher value- added products for domestic and export markets.

And in the United States, processing plant expansion and record aircraft orders have increased demand for stainless steel and non- ferrous alloys so important to today’s nickel industry.

Demand for base metals during the next 18 months is expected to be flat or on the decline, she says.

“Sales of motor vehicles and other consumer durables will decline — particularly in the U.S. — as consumer confidence wanes in response to higher interest rates and demand tapers off after several years of strength,” Mohr predicts.

“Residential construction has already dropped in the United States and is beginning to slow in the United Kingdom.”

Mohr foresees copper averaging $1.25-$1.35(US) per lb in 1989, and falling to the 85 cents -$1 range in 1990. Nickel could average $6-$6.75 this year, and drop to $4-$5 in 1990. High-grade zinc may average 75 cents – 85 cents this year, sliding to 55 cents -70 cents in 1990.

Speaking of copper, international investment firm Barclays de Zoete Wedd points out that at the end of 1988, the copper supply was in a deficit position for the fifth consecutive year, with demand steady and supply disruptions reducing the concentrate supply.

For the period 1986-87, demand for the base metal grew by 3.5%, and for the period 1987-88 was up by 0.9%, says the firm, which expects a change to the pattern for 1989. Over-all demand, it believes, will continue to remain steady and supply will increase, putting the market into significant surplus during the second half of this year.

“This will have the effect of building up stocks again and the price is therefore likely to retreat to more comfortable levels around $1 per lb by year-end,” Barclays predicts. “In 1990, the price is expected to remain around the $1 per lb level.”

Stocks may be building up but they are historically low, says Barclays, adding that “the market remains vulnerable to short-term price hikes caused by supply disruptions.”

In the United States, demand is expected to be fairly constant because of the increased use of copper in automobiles (electric windows and other luxury devices are growing in popularity). The telecommunications wire market is reported to be strong; the building wire market has declined along with housing starts.

Demand is expected to be steady in western Europe and some growth is anticipated from southeast Asia. One sour note is Brazil, where a clampdown on public expenditure is affecting consumption.

Nickel production on the west coast of the United States may soon be a reality again. Cominco Resources International is reported to be studying the feasibility of re- equipping and re-opening the old M.A. Hanna ferronickel smelter in Riddle, Ore. Hanna closed the smelter in 1985.

New operator of the smelter, which could be up and working again in July or August, will be The Glenbrook Nickel Co., a wholly-owned subsidiary of Cominco Resources, which is controlled by Cominco Ltd. Glenbrook’s joint partner in the venture is USA Investments.

Monthly output from the smelter is projected to be one million lb nickel contained in ferronickel. Some 6 million tons ore grading 0.7% (from Hanna’s old Nickel Mountain deposit) is stockpiled on site, enough to feed the smelter for about 10 years.

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