Metals Page: Lead holds its own in mixed metals market

The metal recently rallied in London, where it was trading for as high as 34 cents (US) per lb, well above its average price of just under 30 cents for the first nine months of 1989. Last year the metal averaged 30 cents , while its 1987 price was 27 cents .

Demand for the metal has remained strong and inventories are reported to be low. Supply problems, such as the 23-day strike at a lead-zinc mine in Peru during the summer, are also believed to have contributed to the higher price.

Lead enjoyed a spectacular year in 1988, with global consumption up 2% to a record 4.32 million tonnes. Securities firm Nesbitt Thomson Deacon reports strong automobile sales, particularly in the Pacific Rim areas, helped fuel demand. In Japan, consumption rose 7% and in South Korea, 14%.

Supply, on the other hand, only rose to 4.29 million tonnes, with Peru, which accounts for 5% of the non-communist world’s supply of lead, slipping in output by 25%.

During the first part of 1989, Nesbitt reports the lead supply moved into surplus, attributed to reduced communist imports and lower demand, especially by the U.S. which accounts for 28% of non- communist world consumption.

Traditionally, lead consumption dips during the third quarter and rebounds during the last quarter. Demand for batteries, representing about 80% of lead consumption, is usually greatest during the fourth quarter, with the onset of colder weather. But looming is the early demise of no-lead gasoline.

Toronto-based gold bug Peter Cavelti presents an interesting slant on gold and the potential for its growth in the 1990s in his latest monthly Market Report publication. He reminds his readers that while the precious metal continues to play a monetary role, it also has considerable value as a commodity.

As with any commodity, marginal profitability and a poor production environment lead to reduced supplies and higher prices. In turn, the higher prices boost interest and production begins rising again.

During the past two decades, higher prices and new technology such as the heap leach process have pushed the gold market to new heights. A third major benefit, Cavelti points out, arrived in the form of tax breaks.

Canada has its flow-through financing; the U.S. its tax-efficient partnerships; Australia doesn’t tax gold mines at all; and in South Africa, the government chose to devalue its currency rather than let unprofitable producers close up their operations.

Supplies grew steadily, and fortunately for the producers, demand kept pace.

But it couldn’t last. The gold price dropped, production costs are rising and the tax breaks are losing their attractiveness. (For example, beginning in 1991, a new tax will be applied to Australian gold production.) Slower growth in gold output is sure to follow.

So, Cavelti asks, with industrial consumption of the metal booming and demand now more spread out around the globe (Asia has joined western Europe and North America as major regional buying centres), won’t the effect be positive for the price of gold?

Definitely, he says, at least in the longer term. He cautions the next year or two may present difficulties, however, because of the general economic picture.

“My optimism for gold’s longer- term outlook is based on the fact so much of gold’s demand is now centred on the developing world. It seems safe to assume that countries which are not yet industrialized and which are willing to open up to foreign investment will continue to post superior economic growth rates,” he writes.

“In short, the best thing that could have happened to gold is happening: the metal’s future is no longer tied intricately to the fate of consumers in four or five nations, but is instead more directly tied to the global economy as a whole.”

Still with gold, The Gold Institute in Washington, D.C., reports that between 1980 and 1988, mine output of the yellow metal in the U.S. grew by six times, to 6.6 million oz, allowing domestic production to meet domestic demand. Back in 1980, the U.S. imported 82% of the gold required by manufacturers.

Also, a survey by the institute, involving companies responsible for 60% of U.S. gold output, indicates that between 1982 and 1988, these companies invested $614 million(US) in their domestic exploration activities and $2.8 billion in new mines and equipment, totalling more than $3.4 billion.

By extrapolating those data, the institute reckons total U.S. investment in gold mining during the 7-year period was about $5.7 billion.

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