Better times return for base metals

The outlook for base metals indicates sustained higher prices and company profit levels not seen since the early 1980s, Nesbitt Thomson Deacon states in a report titled The Revival of Base Metals.

“The base metal story for 1987 has been a strong rise in metal prices against the industry’s perception that increases are fleeting and unlikely to persist,” says the report.

Believing “there is substance in the stronger prices,” the author, Julian Baldry, lists five main factors which have influenced the rise in metal prices: decline in the U.S. dollar, declining supply from mine and smelter closures, extremely low inventory levels, fears of higher inflation and prospects of labor strikes against major producers.

The report foresees the value of base metals companies rising as the North American base metals industry enters a new growth era after a period of battling for survival. Metals consumption is at an all- time high, being fed by a slow, steady growth in production. Shutdown capacity is relatively limited, and stockpiles and inventories are extremely low.

Canadian and American currencies are expected to fall further, enhancing the competitiveness and profits for North American producers. Capital investment in new facilities and exploration has been minimal for five years which limits future expansion. North American mines are operating at historically low break-even points. And, according to the author, some metals are experiencing “acute fundamental shortage” and may see their prices move higher. Lead performing well

Lead is one base metal that has performed contrary to expectations. Earlier this decade the future of lead looked bleak: car batteries became lighter and longer-lasting, paints with lead pigments are considered toxic and unsuitable for domestic use, and leaded gasoline is considered a pollutant. As high as 60 cents (US) per lb in 1980, the price of the metal fell to 15 cents in 1984. This year the price has climbed past the 40 cents mark.

“Lead is in short supply for the first time since 1980,” says the report, “and prices are expected to move above current levels. If more of the major producers suffer strike closures, the lead price is likely to increase further and produce large and volatile price swings.”

Zinc is perhaps the odd metal out in that although it is in a funadamental shortage of supply, the problem is not as great compared with the other base metals. Currently trading in the 43 cents -lb range, zinc benefited this summer from the work stoppage at Cominco Ltd.’s Trail, B.C., refinery.

“Producers in Europe have been considering forming a consolidated operating group with the aim of eliminating uneconomic and heavily subsidized mines and smelters,” says the report. “While the progress announced to date is minimal, there appears to be a strong resolve that will eventually lead to further reductions in zinc supply and increases in prices.” Copper looking up

For copper, a depletion in stocks this year has been advantageous for the seller. The metal, which hit 87 cents per lb this year in volatile trading, is expected to perform well into 1988. “The majority of idle copper capacity is in the U.S., and it was expected producers would reopen these mines as soon as profitability was assured, thereby moderating the intensity of price fluctuations,” says the report. “However, reality is different, and copper producers are being far more cautious than anticipated. Thus, the window of time in which copper prices can be expected to do well is actually increasing.”

The situation with aluminum is similar to that of copper, says the report. Low inventory and increasing demand indicate sustainable higher prices. (Spot prices are currently in the 80.5 cents -83.5 cents -per-lb range.) The Japanese, says the report, have all but withdrawn from primary aluminum production, and lost capacity in the U.S. and U.K. because of closures totals about 2 million tonnes. On the other hand, Australia, Brazil and Canada have experienced both new and expanded production capacity.

As for nickel, which is running in the $2.45-$2.55 range, Soviet exports of the metal to non- communist nations appear to be falling off this year compared with 1986. It is estimated actual demand for nickel is expected to exceed non-communist world production by about 51,000 tonnes this year. Helping to stimulate demand for nickel is a shortage of stainless steel scrap in the U.S. and Europe.