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Metal prices set to rise, miners told

Metal prices set to rise, miners told
By WENDY STUECKSunday, March 6, 2005 Updated at 9:05 PM EST
From Monday's Globe and Mail

The metals market is entering a new period of sustained, higher prices reminiscent of conditions seen in the 1950s and 1960s when a rapidly growing Japan drove metal prices to heady levels, industry players were told Sunday at a major mining convention.

And even though the Chinese economy is expected to cool this year and resource companies are scrambling to bring new sources of supply on stream, growing per capita metals consumption in countries such as China, India and Brazil means metal prices may still have further to climb.

“These countries are just at the start of their development where they start to consume a lot more metal,” said Adam Rowley, an analyst with Macquarie Bank Ltd. of London. “And when you convert that to tonnage terms, the impact starts to look a bit frightening.”

Mr. Rowley, speaking at the Prospectors and Developers Association of Canada convention, said today's market conditions are similar to those seen between 1950 and 1973, where per-capita metal consumption grew rapidly in Europe, North America and particularly Japan.

During the 1970s and 1980s, he said, per-capita metals consumption flattened because of recession, oil price shocks and other factors.

But that trend began to reverse in the 1990s, as China began a manufacturing and infrastructure boom.

The country, estimated to consume about 10 per cent of world metal production in the early 1990s, now accounts for between 20 per cent and 25 per cent and is expected to sop up nearly 30 per cent of global metals production by the end of this decade.

China is hungry for metals both to feed its manufacturing sector and to build its own infrastructure.

The power sector accounts for at least 30 per cent of China's total copper consumption, said Ingrid Sternby, associate director of London-based Barclays Capital.

The country plans to spend about $560-billion (U.S.) on power generation and transmission by 2010, she said.

Based on past consumption data, she added, that expansion alone will consume about 500,000 tonnes of copper.

Ms. Sternby predicted a copper deficit this year, but noted that the shortfall — about 200,000 tonnes — will be smaller than the 700,000-tonne deficit seen last year.

New mines are coming into production, but several big projects are not expected to be in production until 2008 or 2009.

“Supply is accelerating, demand is slowing, but copper will remain in deficit in 2005,” Ms. Sternby said. “And I would not rule out prices of $3,500 to $4,000 a tonne over the next six months.”

Copper surged above $3,000 a tonne last March for the first time since 1985. Ms. Sternby said the copper market will likely be volatile, as extremely tight supplies mean that any production disruption, such as a strike or operating problems at a big producer, could quickly push up prices.

The increased interest in the commodities sector by pension and mutual funds could also be a positive influence on prices, she said.

In the U.S. alone, the money invested in commodities-linked mutual funds has grown from about $280-million in 2002 to about $6-billion last year, she said.

David Rae, a spokesman for Toronto-based nickel producer Falconbridge Ltd., says the company sees “very large potential” for growth in nickel demand as per-capita consumption picks up in Southeast Asia. Nickel markets are also expected to be in deficit this year.

A prolonged price slump for metals between 1997 and 2003 meant many companies pulled back on exploration or development projects, meaning that there will be a lag as new projects come on stream.

A prolonged price slump for metals between 1997 and 2003 prompted many companies to pull back on exploration or development projects. This lag will continue while new projects come on stream.

It can now take up to eight years to get a major mine approved and built because of more rigorous environmental reviews and increased community scrutiny.

Forecasts that call for the nickel crunch to ease over the next few years assume that projects now under way can be completed on time and on budget, Mr. Rae said.


LINK: http://www.theglobeandmail.com/servlet/story/RTGAM.20050306.wmetals0306/BNStory/Business/