Metal prices tied to economy’s performance

The bull market in base metals would appear to be over, at least for a London research firm which points out that during the fourth quarter of 1989, metals “either returned to the defensive or continued their uninterrupted slide.”

In its most recent quarterly Metals and Analysis Outlook publication, Metals & Minerals Research Services forecasts a substantial additional decline during 1990 in its aggregate price index. Nickel, copper and zinc are singled out as being the most likely to be the hardest hit in terms of annual price averages.

“The general 1990 price weakness will stem from a combination of low or zero demand growth and steadily, and in some cases sharply, rising production,” writes the firm. “This will lead to an increase in metal inventories (in all cases apart from tin) and a modest rise in stock- consumption ratios.”

A headlong plunge in prices is not predicted. Interestingly, zinc is one metal given an excellent chance of bouncing back should the world economy stage a turnaround.

Zinc averaged about 79 cents (US) per lb in London during the first 11 months of 1989, down slightly from its first-half average of 82 cents . In 1988, the metal averaged 56 cents and in 1987, 36 cents . For 1990, Metals & Minerals predicts an average price for the metal in the 55-60 cents range.

Data from earlier in the year led the research firm to project a slight rise in consumption in 1989 from 1988, that consumption level likely to be the peak for the metal in the current cycle.

“Consumers are now buying again to cover their immediate fabrication needs but, with prices still considerably above their real historical norm, there is no incentive to restock,” writes the firm. Coupled with a poor performance from the global economy, a consumption decline is a likely occurrence.

A drop from 5.3 million tonnes in 1989 in non-communist-world consumption to 5.2 million tonnes is forecast.

Mine production in 1989 (at the time of the writing of the research report) was down from the previous year, the shortfall not entirely attributable to production stoppages caused by strikes and other unrest.

“Zinc has not suffered to anything like the same extent as copper. Instead, it simply seems producers are finding it hard to operate at close to capacity after years of low investment,” writes the firm.

For 1990, mine production is expected to increase from 5.05 million tonnes in 1989 to 5.5-5.6 million tonnes, thanks in part to a startup at Cominco’s huge Red Dog zinc mine in Alaska.

The company thinks zinc producers will be hard pressed to raise their average mine capacity utilization rate in 1990, which could lead to tight stocks in 1990. Should the producers succeed, Metals & Minerals suggests other factors. Supply- side disruptions, for example, could work to keep the zinc market tight.

On gold, the research company says production in the non-communist world will continue to grow well into the 1990s, with even a period of low price quotations unlikely to have much of an effect.

In its report titled “Gold supply prospects into the mid-1990s,” the firm predicts a non-communist- world mine output average increase of 4.8% per annum from 1,537 tonnes in 1988 to 1,945 tonnes in 1993, based on a constant price of $400(US) per oz. (The 1993 amount is double the total 1980 output.)

At a constant price of $350 per oz, total mine output is expected to rise to slightly more than 1,800 tonnes in 1991 and flatten off thereafter.

The firm suggests not only will it be difficult for the price to return to high levels in the medium term but, if gold is taken as a commodity, then the metal is currently over-priced.

Gold averaged about $379 in London during the first 11 months of 1989. In 1988, the metal averaged $437 and in 1987, $446.

Metals & Minerals expects South African output to remain at around current levels of 600 tonnes per year during the early 1990s. Strong growth rates are forecast to continue in North America while in Australia a decline is anticipated. Spectacular increases are expected in other areas, in particular Chile, Ghana and Papua New Guinea. With production rising elsewhere in the world, South Africa’s share of total output will fall accordingly.

Also anticipated in the 1990s is a diminution in the importance of underground mining operations, because of the expenses involved, in favor of low-cost, open pit mining.