Tuesday, January 14, 2014

Indonesian Foot-Shooting And Why Nickel, Copper, Lead And Zinc Are Headed Higher

                       There’s movement in the mining market

It’s too early to get overly excited, but four of the base metals — nickel, copper, lead and zinc — are showing signs of stirring after a period on the sidelines, with all four displaying more zip recently than the fading favorites, iron ore and gold.

Gold, as every investor knows, is in a category called crash-and-burn courtesy of rising U.S. interest rates, and growing confidence that financial Armageddon has been dodged, for now.
Iron ore is in a healthier category, but 12 months after a significant price decline was forecast there are signs that a substantial correction has started with a 2% fall in the price last week translating into 10% falls by a number of leading iron ore producers.

It’s against the overdue downward trend in iron ore, and the erratic price movements of gold, that the base metals have exhibited signs of life though, interestingly, for supply reasons as much as demand.

The next few months should confirm that nickel, copper, lead and zinc are developing a head of steam, which is the result of rising global industrial production as well as kinks in the metal-supply pipeline.
Foot-Shooting Is Always Painful

Biggest kink, so far, is occurring in Indonesia where that country is indulging in a remarkable foot-shooting exercise by introducing a ban on the export of unprocessed ore in an attempt to force miners to invest in value-added processing.

Over time, some exporters might take the step being demanded but it will cost millions of dollars (possibly billions), take years to introduce, and in the meantime a valuable industry supplying the Chinese steel industry is in limbo and the Indonesian Government is missing valuable tax revenue.
Until this week, no one really believed the Indonesians would enforce the ban which has been talked about since 2009 but late last week metal and equity markets were shaken by the realization that the ban would be enforced with the only doubt being for how long.

Nickel, driven largely by short sellers closing out positions, popped 6% higher on the London Metal Exchange while the share prices of nickel exporters in other countries rose by 5% and more.

When Indonesia relents, which it must, the nickel market will retreat from its latest $6.42 a pound to its pre-crisis $6.03 because there is not a shortage of nickel, so long as links in the supply chain are not broken.

The take-away lesson from the Indonesian nickel incident is to note how markets are changing thanks to a combination of steadily rising demand and a lack of investment to replace depleting mines – and if there’s one thing a mine does well it’s deplete.

Zinc Is Next For A Supply Squeeze

Zinc is likely to be the next metal to deliver a supply-side reaction as a series of old mines come to the end of their life with the big event scheduled for next year when the world’s biggest zinc mine, the 500,000-ton-a-year Century mine in Australia locks the gates.

It’s too early to credit a sharp rise in the zinc price on a future supply shortfall because there is a big stockpile of metal on the sidelines.

But, the fact that zinc rose by 15% between late November and late December, as did its close relation, lead, was another metal sector tell-tale pointing to changing conditions ahead.
Copper, the bellwether of the metal market with the moniker of Dr Copper thanks to its economic-prediction credentials, also staged a pre-Christmas price bounce and has recently hit a seven month high of $3.36/lb before easing back slightly.

China Buying Copper For Its Electricity Grid

What makes the copper market worth watching is news the China’s State Grid, the world’s biggest single consumer of copper which it uses in electricity production and distribution, has just announced a 13% increase in infrastructure spending for 2014 to a record $63 billion.

One investment bank, Citi, noted last week that expanding grid investment: “fits with the stronger-than-expected copper demand experienced in China this year, including the solid 6% growth in power cable production.”

Another investment bank, Macquarie, also recognized the significance in the State Grid’s budget boost with a note to clients pointing out that Chinese copper demand growth was set to beat growth in steel demand in 2014.

Copper stockpiles, and growing mine supply, will sit on the copper price for much of the next six-to-12 months, but after that the effect of limited new mine developments will start to have an effect on the supply pipeline, just as those forces are effecting nickel supply and will soon effect zinc and lead.

The commodities boom of a few years ago is dead, but cyclical is a word that should never be forgotten when it comes to the supply and demand of basic raw materials. ‘Forbes’

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