METALS COMMENTARY — Producers planning new capacity

Having taken it on the chin in the recent recession, metals producers — and their customers — are bouncing back in championship style.

By shedding non-core assets and reducing costs by remarkable percentages, producers are managing to maintain and reclaim lucrative market positions. A sign of this renewed vigor is that serious consideration is once again being given to projects aimed at replacing reserves and expanding projects. The similarity between this and previous cycles is the timing involved. Recovery after the onset of the 1982 recession did not affect metal prices until five years later, when a booming world economy finally caused raw material shortages to appear.

If we assume that the latest recession began in 1990, then we appear to be right on schedule for another upturn in the prices of raw materials (ideally a modest and non-inflationary one).

There are, on the other hand, some important differences between this and previous cycles.

The re-allocation of excess sales capacities, previously taken by the armaments industry, is nearing an end. For whatever reason, shutdowns by producers in the West and in the Commonwealth of Independent States have balanced supply and demand for most base metals. In the short term, rising demand can only reduce stocks, as producers will need many months to start up significant new capacity.

All excess inventories are now in the hands not of producers, but of well-heeled investors (on the exchanges), as well as in traders’ warehouses. As the inventory of each metal starts to fall, investors — unlike (more cautious) producers — will ask and receive higher prices at unprecedented rates. Recent substantial rises in many of the minor metals are but precursors to similar events we can expect in base metals.

While governments are anxious to keep a lid on inflation, sharply improving world demand (brought about by rising industrial production) can only result in international pressures on limited raw material supplies and prices. We are seeing signs of this already, as some governments attempt to discourage exports and steel companies experience difficulty obtaining desired grades of scrap at prices that allow them to make a profit with their own selling prices.

As a result, base metals — characterized by high exchange inventories, strong physical markets, rising prices and market euphoria — remain near, or above, their recent trading ranges.

The following prices and inventories of the London Metal Exchange (LME) are for the month of October to date, with the previous month’s figures shown in parentheses.

Ignoring ever-higher stocks and announcements by large producers that they will expand output next year, nickel rose to US$2.96 (US$2.89) per lb. as inventories advanced to 146,772 (144,432) tonnes.

There are increasing rumors that the onset of winter may disrupt Russian nickel shipments. Current prices are apparently inadequate to cover taxes, icebreakers, operations, capital costs and basic necessities for half a million dependents.

Consolidating after speculative gains and supported by producers moving their benchmark truckload cathode price to US$25 from US$21 per lb., free market cobalt prices eased to US$26.50 (US$28.50).

In response to strong demand and news that U.S. producers are again raising premiums, lead rose to US28.6 cents (US27.8 cents) per lb. as stocks nudged ahead to 367,775 (371,350) tonnes.

Optimism among investors and the slowing growth in inventories nudged zinc to US47.1 cents (US45 cents) per lb., as stocks also edged up, to slightly higher than last month’s 1.2 million tonnes.

The steady deterioration in the combined LME-Commodity Exchange (Comex) of New York inventory to 348,351 (377,695) tonnes, together with news of new Chilean production, temporarily balanced copper prices at US$1.13 (US$1.14) per lb.

Steadily rising steel demand again strengthened molybdenum oxide price quotes, to US$4.10 (US$3.90) per lb.

Meanwhile, persistent currency and inflation fears kept gold around US$391.19 (US$391.37) per oz. and silver at US$5.56 (US$5.52) per oz.

Equally firm were prices for platinum group metals. Rumors of falling Russian production steadied platinum at US$417.75 (US$417.19) per oz., palladium at US$152.64 (US$152.99) per oz. and rhodium at US$800 (unchanged from September).

In other precious metals news, reports were recently circulating to the effect that several parcels of “ore or concentrate,” originating in the U.S., contained extremely high assays of gold and other precious metals. However, according to a European source, one parcel, when assayed, was found to contain no significant metal values. And although another parcel, in North America, was reported as having some precious metal values, it was also described as being radioactive. Potential buyers are cautioned to seek expert assistance before purchasing such materials.

— The author is a metals agent, broker and consultant specializing in the marketing of mining properties.