Shearson rules out big slump for metals

The continuing Persian Gulf oil crisis may have dimmed prospects for lead and zinc, but a repeat of the 1974-75 and 1979-82 periods, when prices fell sharply and then remained depressed for a number of years, is not anticipated, says an international securities firm. The oil-induced recessions which adversely affected the mining sector in particular during those periods are not expected to materialize this time around, writes Shearson Lehman Brothers of London in its Annual Review of the World Lead and Zinc Industries 1990.

Although a recession is projected for “anglo-saxon” economies, Shearson says the gross national product for the industrialized nations of the Organization for Economic Co-operation and Development will register modest growth.

Other reasons given are that substitution will not be as severe as in previous oil shocks; non-industrialized nations make up a larger proportion of total demand; utilization rates are higher and supply problems are likely to remain a feature; and inventories will be rebuilt from low levels.

The Shearson researchers say current prices still represent shortage levels, and the dominant trend during the next 12 months will be down as inventories are rebuilt. Supply problems are likely to occur, lifting period averages.

“Given the uncertainty in the Gulf, oil prices could exceed our central scenario of US$27 per barrel in 1991 and therefore the recession could be more widespread,” write the researchers. “If that is the case, then there is scope for prices to fall sharply, as prices are still comfortably in excess of marginal production costs.”

Shearson’s “best estimate” for London Metal Exchange cash prices for 1990 for lead is US38 cents per lb., and for zinc US72 cents per lb. Forecast for lead for 1991 is an average price of US30 cents and for 1992, US32 cents; forecast for zinc for 1991 is an average price of US59 cents and for 1992, US62 cents.

An overall slight increase in global lead consumption is projected for this year. Likely declines in North and South America should be offset by the strength of demand in continental Europe and the Far East.

For zinc, Shearson expects demand from the Far East will grow by 2% this year, limiting the fall in total 1990 non-communist world offtake to less than 1%. A minor increase in zinc consumption is predicted for 1991, to be followed by a sharp pickup of 3.8% in 1992.

Of particular importance to the zinc industry during the last decade was the galvanizing sector. Shearson points out that beginning in 1980, zinc consumption from this source grew at an average annual rate of 3%. Unfortunately, weakness of other sectors (brass and diecastings) led to an overall decline in total demand by 1989.