Metals Markets Take A Breather

The fourth trading week of 2010 was a time to look at the big picture, as base and precious metals markets saw another round of substantial corrections.

The base metals subsector pulled back across the board, amid news the Chinese government is reining in lending by the country’s banks to cool off the bubbly Chinese economy, and the Reserve Bank of India had boosted reserve requirements for Indian banks to 5.75% from 5.00%, for similar reasons.

By Feb. 1, the three-month prices on a per-lb. basis for the major base metals were US$3.01 for copper, US94¢ for zinc, US$8.25 for nickel, US90¢ for lead, and US91¢ for aluminum — off by roughly 15% as a group since early January.

Steel and scrap prices were also blindsided by Toyota’s surprise announcement that it would temporarily shut down six North American auto manufacturing plants in the wake of a major recall of its vehicles and new doubts about the automaker’s safety and quality record.

• Precious metals prices weren’t spared in the downturn, but were more affected by a strong rally in the U.S. dollar stemming from ongoing fears of credit defaults by Greece, Portugal and Spain — three of the weakest members of the European Union. Greece’s sovereign debt was downgraded in December, and the European Central Bank has insisted there will be no bailout, but the question these days is still, “Is Greece too big to fail?”

Despite the dollar rally, spot gold prices have shown resilience and look to have held support at US$1,079 per oz., and have since rebounded convincingly above US$1,100 per oz.

• In Chile, one of the world’s biggest copper mines is set to get even bigger. The Chilean government issued a key environmental permit allowing the Collahuasi mine to expand by about 20%, taking its annual copper-production capacity from 460,000 tonnes copper to 560,000 tonnes copper by perhaps 2013.

The US$750-million expansion would allow daily milling capacity to rise to 170,000 tonnes from 140,000 tonnes, without the use of extra water. Xstrata and Anglo American each own 44% of the mine, with a Mitsui-led Japanese consortium holding the rest.

• Another hot topic for discussion in Chile is a new proposal by billionaire businessman and President-Elect Sebastian Pinera to privatize up to a fifth of 100% state-owned Codelco.

The world’s largest copper producer is already set to spend a record US$2.3 billion this year on mega-projects, and a limited privatization would be an easy way to raise cash.

However, the centre-right Pinera, who recently ended the centre-left’s 20-year grip on power in the country, told reporters in Santiago that any Codelco sale “will require dialogue and a wide-reaching agreement in our society.”

Unions representing the country’s copper miners have now come out strongly against any privatization, and the general population seems to prefer that Codelco remain firmly in state hands.

Pinera’s administration is also looking at changing the royalty rates paid by private miners.

• It’s one of the larger financings in mining recently: Ivanhoe Mines closed its C$459-million offering of 27 million shares at $17 apiece in subsidiary SouthGobi Energy Resources, or a 16.8% stake, with funds to be ploughed into coal assets in southern Mongolia.

The financing coincided with SouthGobi’s new Hong Kong listing. However, celebrations were cut short, as shares tumbled 11% on the first day of Hong Kong trading — a bit worse than the wider, free-falling commodities markets.

• There was a revival in the downtrodden potash subsector, thanks to BHP Billiton’s welcome $341-million cash takeover bid for Athabasca Potash. The latter’s promising Burr potash project in Saskatchewan is beside BHP’s Jansen potash project.

Industry leader Potash Corp. of Saskatchewan commented in late January that, “in sharp contrast to the close of 2008, when economic uncertainty led farmers to become extremely cautious, the fourth quarter of 2009 reflected the beginning of the recovery in fertilizers.”

Striking an optimistic note, PCS noted that strong crop margins resulting from improving commodity prices and lower input costs “appeared to refocus farmers and fertilizer dealers on the need to address nutrient shortfalls in the soils and the distribution chain created by nearly 18 months of limited fertilizer purchasing.”

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