Metals should recover in year 2000: experts — New technology expected to slash production costs

The world economy should stabilize this year and begin a modest recovery in the year 2000, triggering a recovery in metals prices.

Peter O’Connor, an international equity investment manager, delivered these words of encouragement to delegates attending a symposium of the Mineral Economic Society in Toronto.

O’Connor’s views were shared by several other speakers who noted that the positive outlook for 2000 was based on a policy shift in late 1998 as central bankers reduced interest rates to reflate the economy. The benefits of that exercise are now flowing to the U.S. and Europe, though growth increases are expected from Japan and some Southeast Asian nations next year. Even Brazil and Latin America, the latest casualties of the global meltdown, are expected to show improvement by 2000.

Ted Yates, director of market research for Cominco, pointed out that in 1997, the eight Asian tigers and Japan consumed 28% of Western copper — more than the U.S. (at 25%) and a little below Western Europe (at 31%). But by 1998, copper consumption in the eight Asian tigers plunged 15.1%, after growing on trend at 15.2% each year since 1985.

“The peak of 1997 may not be achieved until 2002,” Yates said. “However, we believe the tigers will emerge from this setback on a much sounder footing.”

Yates described the zinc picture as similar to copper, explaining that Western World consumption has grown on trend at 2.3% each year since 1980, peaking in 1997 at 6.4 million tonnes. “The Asian crisis means essentially flat consumption in 1998 and 1999 before resuming growth in 2000.”

Oyvind Hushovd, president of Falconbridge, examined the impact of China and the Commonwealth of Independent States on the overall nickel market, which now stands at about 1 million tonnes per year, roughly equal to US$4 billion.

“Over the past ten years, Chinese nickel consumption has seen reasonable growth, and production has only barely kept pace, leaving the country’s trade balance more or less neutral today,” he said. “The CIS has had quite a different history. While output of nickel has fallen markedly since the dissolution of the Soviet Union, consumption has completely collapsed.”

Hushovd pointed out that in 1988, the CIS accounted for 31% of world nickel production, compared with only 3% in China. A decade later, the CIS had fallen to 22%, with China little changed. More serious and dramatic was the collapse of consumption. In 1988, Russia accounted for 23% of world consumption. By 1998, this had plummeted to only 3%, while China doubled (to 4%) over the same period. “The net result has been that the volume available for export has risen sharply, from 155,000 tonnes in 1996 to 217,000 tonnes in 1997, and 200,000 tonnes this past year.”

Looking ahead, Hushovd said the Russians appear to have substantial reserves — “certainly enough to maintain their significant influence in the market.” But, he added, they are in dire need of capital for everything from plant and equipment to working capital. He also said that without any exports at all from Russia over the past decade, the industry might have been even worse off, as the extremely low inventories would have caused higher prices and encouraged consumers to substitute out of nickel.

Gordon Bacon, vice-president of Inco’s metals technology division, examined nickel supply over the next decade, with emphasis on changing technology for laterites, namely pressure acid leach (PAL).

While production is currently dominated by sulphide producers, Bacon predicts that a significant proportion of nickel will be hydrometallurgically produced by 2010. However, he cautioned that some of the processes have not yet been demonstrated on a commercial scale, while others have potential problems. And don’t count on byproduct cobalt to carry the day, he added, as prices may fall to US$5 per lb. (from US$10) as more PAL plants are commissioned and the supply of cobalt increases.

On the mining front, Bacon compared the estimated average mining cost for various types of deposits to demonstrate their dramatic cost differential. An average underground mine would have costs of US$40 per tonne, while open-pit mines would be half that amount. Costs for a laterite mine are expected to average US$8 per tonne.

“New technology is required to reduce underground mining costs,” Bacon said, adding that advancements in remote mining or telemining, new ground control methods, automated drilling and remote-sensing delineation and computerized mine planning could cut mine operating costs in half. “This would extend the economic life of some underground sulphide mines and could provide a barrier to entry of greenfield laterite deposits.”

Bacon explained that comparing the long-term cash-cost picture of sulphide and laterite projects is complicated because of differing byproduct credits. Because many sulphide nickel deposits also contain copper or platinum group metals, they should be able to compete with laterite smelting operations (saprolites), which have operating costs greater than US$2 per lb. nickel on average, owing to high-energy costs and low (or nil) byproduct credits. (Costs are determined by adding the processing and refining costs to the mining costs and then subtracting the applicable metal credits.)

However, Bacon pointed out that cobalt credits at many of the new PAL operations in Australia and elsewhere (limonites) could reduce the net operating expenditure to an estimated US$1.30 per lb. nickel, which is well below the present average of US$1.60 per lb. at underground sulphide deposits, and the average of US$1.80 per lb. for open-pit sulphide deposits (which usually have minor amounts of copper, cobalt and PGMs).

After factoring in capital costs and weak demand for metals, Bacon said both “above average” and “average” PAL projects would require nickel prices of more than US$3 per lb. to be economically viable.

Even existing nickel operations are suffering, he added. “At current prices, few producers are profitable.”