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Booming Asian growth lifts prices: Africa's metal producers can expect another good year, with stronger global demand leading to high prices. This analysis is by Moin Siddiqi.

Metals and minerals have high correlations with global industrial activity, and with the prices of many metals currently running at multi-year highs, the market's fundamentals appear to resemble the bullish trends of 1998-2000. During that period, robust world GDP growth led to a boom in the metals used for industrial manufacturing.

Sustained strong prices will benefit the major mineral producing countries like South Africa, Australia, Brazil, Chile, China, Russia, Kazakhstan, Canada, Indonesia and the US. South Africa, in fact, ranks second in the world after the US in terms of the production of minerals. The US produces 78 minerals compared to SA's 55.

Sentiment in the base metals markets improved steadily over the past year, gains aided by producer cutbacks, falling inventories, continued weakness of the US dollar (in which all commodities are priced) versus major world currencies, speculative interest in metals and, most importantly, buoyant consumption.

This optimistic sentiment reflects a broad manufacturing recovery in the industrialised world led by the US where there are tangible signs of both capital spending and a manufacturing upturn. That recovery is widely believed to be due to the fiscal/ monetary stimuli imposed after the events of 9/11.

According to the International Monetary Fund (IMF), world output is forecast to grow by 4.6% in 2004, up from last year's 3.2%. The Fund is particularly upbeat on the prospects for the US economy which consumes almost one-third of the globe's mineral production. US growth is forecast at 4.6%, a marked contrast to the negligible 0.3% growth of 2001.

CHINA DRIVES DEMAND

Meanwhile, Japan, the world's second-largest economy, is now recovering from its prolonged depression. The IMF estimates Japan's GDP growth at 3.2% this year, exceeding the Eurozone's 1.9% where overall industrial activity remains sluggish--particularly in Germany and Italy. The stronger euro is considered an obstacle to industrial growth in the Eurozone.

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The manufacturing rebound in South-East Asia--China in particular--is also underpinning industrial metals' prices. The demand for metals in China--the fastest growing economy on earth (if one excludes the oil-fueled growth in Equatorial Guinea) is similarly driving the metal market into new territory.

The People's Republic of China is exerting a huge demand for raw materials, with industrial production having doubled within three years. This, in turn, causes commodity price inflation because of supply restrictions, at least in the short-term.

The investment bank Merrill Lynch notes: "China ranks sixth in the world in terms of GDP at current prices. But in industrial output it ranks third ahead of Germany and second only to the US and Japan. China consumes about one-third of global iron-ore production and one-quarter of platinum production. It also consumes about 15%-20% of many of the other base metals."

Barclays Capital Research agrees, commenting: "China is still at the bottom of the ladder. The country's demand for commodities could last for some time." For African metals producers, China remains a rapidly expanding market for the foreseeable future.

INVESTORS PILE IN

The weak US dollar, which makes dollar-denominated metals relatively cheaper for consumers in "non-dollar pegged or linked" regions, has boosted consumption in the EU and Japan. As the French major banking group Societe Generale observed in a note, the peak of base-metal prices in the bull market of 1998 broadly coincided with the US dollar's plunge over the March quarter of that year.

However, the bank warned that if the US dollar recovers too strongly, this might trigger aggressive selling of metals, thereby causing lower prices--as happened in 2001-02.

More recently, metals have benefited from a sizeable influx of fund money as large institutional investors have sought a sanctuary from the volatile dollar and weak financial markets by investing in commodities futures, whose prices rise as the dollar falls. Equity investors have been betting on a long bull cycle in base-metals, and shifting money into prime mining stocks like BHP-Billiton, Anglo American, Noranda Mining, Rio Tinto and Xstrata plc. The spectacular movements in industrial metal prices during the first-quarter of this year saw tin prices rising by 62%, copper by 51%, lead by 34%, zinc by 20%, nickel by 14% and aluminium by 13%. One London trader remarked: "It's a bull market across the whole base metals' complex, which is unusual as past rallies are normally in one or two metals at a time, rather than all of them."

Most metals are expected to dip into supply deficit this year, reflecting strong demand and lean stocks. Looking ahead, higher prices will induce development of new capacities and the reactivation of idle mines. So prices should eventually drop.

Real prices--adjusted for inflation--may also fall in the long-term, as new technologies and better management practices lead to lower exploration and production (E & P) costs. There should be little constraint on primary resource availability.

COPPER

The most-heavily traded base metal, with numerous industrial applications, broke the $3,100 per tonne (t) level in early April--its highest price since January 1995.

Standard Bank of South Africa remarked: "If copper continues to move at the same speed, it's very likely we shall see it break new highs." Soaring Chinese demand to feed its robust 8% GDP growth, a recovery in the information technology sector and rising capital spending in the US and Japan, have all fuelled the rise in the copper price.

Last year, China overtook the US as the world's biggest copper-consumer, with imports of 1.36 million tones (m/t).

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Mine output has remained quite constant in recent years, averaging 15.3m/t. For 2003, the World Bureau of Metal Statistics reported record highs in copper usage (15.7m/t) amid lower production, thus creating a supply deficit of 351,000t.

Global stocks have dipped below 800,000t, compared to a 1.7m/t stockpile recorded during the summer of 2002, according to HSBC Investment Bank.

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Africa's biggest copper producer, Zambia, expects output to rise by 8.5% to 380,000/t in 2004, but the world market supply is still projected to remain very tight with deficit projections ranging from 500,000t to 1m/t.

Phelps Dodge Corp (US) expects worldwide copper usage to rise by 4%. Given the influx of fund money and stronger demand, copper should attract higher physical premiums, with prices on the London Metal Exchange (LME) averaging $2,500/t-$3,000/t, up from $1,779/t in 2003.

ALUMINIUM

The fundamentals for aluminium are improving thanks to increased demand from key aluminium consuming sectors--notably construction, automobiles, aviation, power cables and packaging. A major growth in electric power sectors plus rapidly expanding car production and a commercial and residential construction boom across China are underpinning aluminium prices.

According to the London-based Economist Intelligence Unit (EIU), world usage of primary aluminium in 2003 rose 8.5% to 27.79m/t, versus total output of 27.93m/t. New capacities in South Africa, Mozambique, Canada and Norway are now onstream.

Bloomsbury Minerals Economics (Australia), projects a supply-deficit of 300,000t, with consumption and output estimated at 29m/t and 28.7m/t, respectively, in 2004. It expects a widening of the supply shortfall to 493,000t next year--whilst the average 2004 price for aluminium is forecast at $1,642/t, compared to $1,433/t in 2003.

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Aluminium is also supported by higher prices and tighter alumina supplies (the main raw material for the manufacture of aluminium). Production costs of smelters rise when alumina becomes costly, which may result in smelter closures. Last March, alumina spot price was at $450/t.

NICKEL

A combination of factors, namely depleted inventories, a reviving demand from stainless steel mills (which account for two-thirds of nickel offtake) especially in China and North America, and tighter supplies reflecting acute shortage of new production capacity have all supported nickel which hit a 14-year high of $17,650/t last January. But prices fell back as Russia's Norilsk Nickel, the world's largest producer, released some of its stockpiles during the first-quarter.

With continued demand for stainless steel and recovery in Japan and Western Europe gathering momentum, consumption in 2004 will exceed production. Australia's Macquarie Bank predicts a 46,000t supply deficit. Global demand is surging by 7% per year, whereas annual supplies are expanding by about 5%. The LME prices are forecast to average $13,500/t-$15,000/t this year, well above last year's $9,630/t.

There are concerns over supply because no major new mines are scheduled to come on-stream in the medium-term. But sustained high prices could encourage consumers towards substitution, thus harming the long-term interest of nickel producers.

ZINC AND LEAD

Zinc--used primarily to galvanise steel for infrastructure projects, construction and the automotive industry--reached a four-year high of $1,143/t last February. Galvanising accounts for about 50% of zinc's offtake.

Analysts estimate a global zinc concentrates deficit of around 130,000t in 2004, compared with last year's shortfall of 250,000t. Supply tightness reflects shutdowns of smelters and steep drop in China's net exports because of booming domestic consumption. LME zinc prices are expected to average $1,036/t-up from last year's $828/t.

The fundamentals for its sister metal, lead, are equally bullish with falling stocks and sizeable deficits, coupled with improving demand. The International Lead and Zinc Study Group indicates that, in the Western world, refined lead consumption grew by just 0.4% in 2003. Lead production dropped by 4% resulting in 90,000t supply-deficit.

In 2004, the market deficit is forecast at 100,000t-165,000t and LME prices could average $749/t-$800/t. Last year, lead's average price was $514/t. About two-thirds of annual output--projected this year at 6.7m/t--is used in electric storage batteries in automobiles.

Lead is used as protective coverings for electrical cables and main ingredient of solder--used in the joining of metal circuits.

TIN

Tin is mainly used as a coating to protect steel. Many billions of cans are manufactured from tin-plated steel because tin is resistant to corrosion. But in food containers, plastic coatings are repidly replacing the use of tin. The use of tin use has also dropped with the increasing use of aluminium to make cans.

Indonesia, China, Malaysia, Brazil and Bolivia are major producers of tin ore but Africa holds large untapped reserves of the metal.

The market is being powered by a growing demand from the Asian electronics sector where tin-based solders are replacing traditional lead-based ones. In early April, tin prices hit a new peak at $9,115/t. Meanwhile, supply restraints are causing concerns among user nations.

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All Chinese tin output is consumed locally, and Indonesia's industry--the world's biggest producer--has been hindered by an ore export ban since June 2002. Metals consultancy CRU, predicts a global tin deficit of 20,000t in 2004. LME prices are expected to average above the $7,000/t level, comfortably exceeding last year's $4890/t.

COBALT

African cobalt production, led by Congo (DRC), Zambia and Morocco, accounted for over 50% of the global supply of the metal in 2003 at 41,000t. The DRC alone holds more than half of the world's known reserves. The state company, La Generale des Carrieres et des Mines (Gecamines) exercises a monopoly over this resource.

Cobalt is usually mined as by-product of other metals, principally copper, nickel and platinum ores. By the end of last March, prices firmed to $25/lb for lower grades and $28/lb for higher-quality material. Cobalt's all time record price was posted at $45/lb in 1978 with the US then, as now, being the principal consumer.

The US's rising defence spending, and improved confidence in the civilian aviation industry bodes well for cobalt's prospects. About two-thirds of cobalt produced is used in its metallic form as a super-alloy in jet engines and gas-turbines; the metal is also used in glass manufacture, paints, rechargeable batteries, and synthetic materials. Experts reckon that future demand will outpace supply, resulting in larger deficits.

Civil stability in DRC will facilitate E & P of new deposits and the rehabilitation of existing mines.

PLATINUM AND PALLADIUM

Rallies in base-metals have also filtered into precious metals that have industrial uses--notably platinum and palladium, which are used by automakers in catalytic converters and by photographic film manufacturers. In late March, platinum hit a 24-year high of $924/oz and silver ($7.94/oz)--the highest in 16 years. Commenting on 2004's outlook, Impala Platinum (South Africa), said: "Demand for platinum is likely to continue at current levels while supply is somewhat constrained. A sixth year of supply-deficit is possible in 2004."
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Title Annotation:Industrial Metals
Author:Siddiqi, Moin
Publication:African Business
Geographic Code:6SOUT
Date:May 1, 2004
Words:2095
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