METALS COMMENTARY — Interesting year ahead for metals

Along with everyone else, Canadian metal producers finished 1993 with a sigh of relief, and hope for a better year ahead.

Last year, amidst the most severe recession in decades, Canadian miners were increasingly discouraged by governments at all levels. Sitting on years of accumulated annual deficits, governments moved again and again to increase taxes and fees rather than attempt even modest cuts — an across-the-board 10%, for example — to match falling revenues and rising deficits. A most alarming development in Canadian jurisdictions is the rise of autocratic government action. This adds to the difficulty of attracting long-term mining funds, as investors may be held to ransom some years later. To cite only two examples:

* Elliot Lake, Ont., where the Atomic Energy Control Board, together with the federal and provincial governments, is busily dictating new closure standards to the uranium companies which mined there for many years and complied with all standards of the day. (Who would ever consider opening another uranium mine in Ontario?)

* The debacle in British Columbia last summer in which the provincial government, responding to environmentalists’ outcries, interrupted due process to declare the Windy Craggy property a designated park and, therefore, no longer available for mining. It appears environmental groups are now the main decision-makers in all natural resource matters. Like other jurisdictions around the world, Canadian governments are pinning their hopes on raising exports of manufactured goods to reduce unemployment while discouraging (or at best ignoring) other domestic areas such as the basic resource industries. It takes a long time for a manufacturer to establish an export market and this is not made easier by the present over-capacity for most products in the Western World.

Elsewhere, the recent rise in large trading blocks heralds great benefits and dangers. As of Jan. 1, the European Community expanded again to include almost all Western Europe in a free-trade area, and the North American Free Trade Agreement came into being in North America.

In spite of negotiations over the General Agreement on Tariffs and Trade, the continued attempts by many countries to export unemployment by selling products below reasonable cost or prices in their home markets is generating much animosity, as well as increasing trade barriers. Because of the ripple effect into downstream industries, metals and alloys are the favorite initial targets for trade sanctions.

The collapse of the former Soviet Union and the sudden drop in its metals consumption in the early 1990s pushed enormous quantities of metals and alloys into Western countries already beset with recession. These commodities were absorbed and the result was mine and smelter closures (withmore to come) in all markets, together with low prices. In 1993, the outflow rate from the Commonwealth of Independent States (CIS) began to ebb, but future quantities are expected to remain higher than in the past.

In 1994, several developments are worth watching:

* CIS metal producers will lose some market share as real costs for labor, energy, transport and environment overtake their plants. As a result of this activity and a continual economic upturn, Western metal producers may experience some temporary relief with improved prices. However, if inventories do not drop, lower prices will quickly return.

* In South Africa, elections in April and subsequent actions by the newly-elected government toward the private sector will largely determine the market for ferro-alloys and platinum group metals (PGM). There has been talk in the past of nationalizing key industries and, more recently, of dismantling some of the large mining houses.

* Elsewhere, in many parts of Africa, the present system is not working. Beset by drought, corruption, lawlessness, overpopulation and poverty, the administrative boundaries of many countries may soon be reorganized, particularly where there are severe tribal animosities. The list, for starters, includes Angola, Somalia, Sudan, Zaire and Zambia. * In Asia, to establish some order, CIS members will soon have to organize their financial and trading activities, probably in the form of a new trading bloc. In the short term, falling output by CIS miners may boost the fortunes of palladium, cobalt and nickel.

* Last month, most metal markets were characterized by speculative buying in anticipation of rising demand and falling production and inventories in the first half of 1994. However, inventories for most metals resumed their rise over the holiday period, which, if the trend continues, does not bode well for prices.

Spurred by optimistic first-quarter forecasts of falling production and inventories, average nickel prices on the London Metal Exchange (LME) in December, 1993, rose to US$2.32 (US$2.10) per lb. (the previous month’s figures are in parenthesis). LME inventory growth also resumed, bouncing up to 124,104 (119,196) tonnes.

Cobalt rose to the US$15-$16-per-lb. range, mainly in reaction to reports that mineral-rich Katanga province in southern Zaire intends to secede from the country. Prices then settled back to await further developments. Western brands are at US$14.50 (US$11.50) per lb., with Russian products selling for US$13.50 (US$11).

Serious drops in refinery output and continually good battery demand kept LME lead prices ahead at US21.4 cents (US18.1 cents) per lb., as stocks also edged up to 303,650 (298,750) tonnes.

LME zinc stocks surged again, reaching 906,700 (864,525) tonnes as prices continue to defy gravity at US44.2 cents (US42.1 cents) per lb. LME copper prices steadily inched upwards in December, reaching US78.1 cents (US73.9 cents) per lb. as the combination of inventories on the LME and the Commodity Exchange of New York also rose, to 666,655 (663,782) tonnes. Maintained by producer-established floor prices, molybdenum oxide prices hovered around US$2.70 (US$2.55) per lb.

Precious metals trading remains generally bullish. Rising to test the 1993 average high of US$392 per oz., gold closed December ahead at US$382.87 (US$373.94) per oz. Silver surged to US$4.96 (US$4.53) per oz. In mixed markets, the PGM group languished, awaiting clarification of production rates in Russia and South Africa. Platinum prices moved up to US$382.21 (US$374.62) per oz. and palladium settled to US$124.78 (US$128.45) per oz. Rhodium was down slightly at US$980 (US$1,050) per oz. — Jack Dupuis is a metals agent, broker and consultant specializing in the marketing of mining properties.