Supply-demand balance for base metals expected to continue

Adding some spice to the summer scene has been the takeover battle for Falconbridge between Amax and Noranda.

Looking ahead to the remainder of this year, John Lydall of First Marathon Securities is predicting improved demand and higher prices for many of the metals.

“Most of the base metals markets are likely to emerge from the quieter summer period with supply and demand still finely balanced,” he writes in a recent monthly publication.

London Metal Exchange (LME) inventories remain at low levels, with the exception of aluminum. In general, prices have tended to move higher of late. Prices for copper, zinc, nickel and lead have been experiencing backwardation.

“As these markets return to a more normal level of business over the next six weeks, the continuing preoccupation is going to be, on the demand side, the likely strength of worldwide economic growth for the next 6-9 months, and on the supply side, the likely effect of supply disruptions, particularly in the copper and zinc markets,” Lydall says.

“With inventories remaining very low for all of the metals, small changes in the supply-demand balance will continue to have a major effect on the metals prices, particularly on the LME.”

Demand this year is expected to equal, or approach, record levels for all of the base metals. And in 1990, with the economies of many nations continuing to grow, it is not anticipated metal consumption will fall sharply.

On the supply side, production shortfalls experienced this year are not likely to go away, he says.

“With little new capacity coming on stream following years of under-investment in new mines, and in particular, new smelters, some disruptions in production just have to be expected. With inventories at such low levels, the effect of these supply disruptions are being magnified,” according to Lydall.

Copper has been in the spotlight of late because of production problems being experienced in different areas of the world, in particular Peru, Papua New Guinea and British Columbia.

In South America, miners in Peru, a country rich in a variety of metals, recently walked off the job in a dispute involving, among other issues, pay increases. Troubles in the Peruvian mining industry seem to have become commonplace. And in British Columbia, workers at the Highland Valley Copper operation went on strike in early July; it remains to be seen whether management will declare force majeure on its September and October shipments.

Across the ocean, repairs to the Bougainville copper-gold mining operations in Papua New Guinea were reported to have been held up because of the safety threat to workers. Rebel landowners and their acts of sabotage forced the closure of the mine in May.

Highland Valley and Bougainville are major world suppliers of copper concentrate to independent copper smelters.

Lydall predicts nickel prices, having firmed in recent weeks, could move higher with the return of buyers. “Stainless steel manufacturers have tended to deplete their inventories of nickel over the last several months, while waiting for nickel prices to fall further,” he writes.

“It seems very likely this destocking process has now run its course, and with the outlook remaining quite buoyant for stainless steel for the next 6-9 months, nickel demand should start to pick up again.”

Not much has been heard of late from the zinc market. Lighter demand from the automotive sector has been offset in large part by reduced production, keeping supply and demand more or less in balance. The troubles in Peru could play a part in sending zinc prices higher.

The aluminum market, with its increasing inventory and lower prices, is the weakest of the metals, Lydall says.

As everyone is supposed to know, gold protects against inflation. The precious metal is also used on aircraft to protect against heat-seeking missiles.

The Gold Institute in Washington reports heat-reflective “laser gold,” plated mirror-like devices which prevent any attacking missiles from locking on to their target, is used to protect the airplanes of the president of the United States and the prime minister of England, and most of the fighter aircraft and combat helicopters of the U.S. Air Force.

Gold is also used in the electrically driven gyroscope which is at the heart of every airplane’s navigational system. Gold slip rings (sliding electrical contacts) must be used to make sure the gyroscope receives the power it needs in order to maintain its precise, fixed altitude no matter how the aircraft rolls, pitches and turns.

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