Copper is the star as Africa enjoys price boom: the exceptionally high prices of commodities, particularly those of industrial metals, which leapt by over 50% last year, will help Africa nudge past 6% growth this year. The trend is likely to continue for the next couple of years, driven mainly by strong demand from China. Moin Siddiqi reports.

Mineral-rich Africa is reaping the benefits of strong commodity prices driven by robust global demand. Africa's economic growth is projected at 6% this year, the highest in two decades, according to the African Development Bank. It will be primarily fuelled by demand from China and other rapidly-growing economies for the continent's crude oil and metals.

In 2006, energy and metal exports comprised about 75% of the African total. Metals prices leapt by 57% last year, the steepest rise among the main categories in the IMF commodity index. Three main factors explain the boom in industrial metals: strong global economic growth averaging 5.2% a year between 2004-06 and in particular the Chinese demand for metals; low investments in mining over the past decade resulting in a depleted productive capacity; and limited new discoveries.

China's insatiable thirst for raw materials to feed its industries has been a significant driver, accounting for almost all of the increase in the world's use of nickel and tin since 2002. The country's consumption of lead and zinc grew faster than the rest of the world, while China's demand for copper, aluminium and steel now accounts for half of global production.

Although China also boasts natural resources, its blistering rates of industrial expansion and export-led growth (10.7% in 2006) demands large quantities of raw materials from mainly Africa and South America.

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Metal prices in the first-half of 2007 hit fresh highs, led by nickel at $54,200/t, tin $15,000/t, copper $8,591/t, zinc $4,555/t, aluminium $3,150/t, and lead $2,385/t.

Despite these record prices, the sector remains in 'backwardation' where futures prices over 15 months are below spot prices. Looking ahead, the IMF envisages copper and zinc prices falling as new capacity comes onstream, whereas nickel, tin and uranium may yet face serious supply constraints and consequent price increases. However, long-term prices are expected to weaken across the sector as output continues to catch up with demand. But higher output costs (fuel, equipment and wages) are likely to keep prices above historical averages. Industrial commodities generally exhibit high correlations with trends in economic cycles. The metal bulls fear the US economy, which consumes over a quarter of global mineral production, is now being dragged down by a weaker housing market. Offsetting this factor, growth in the developing world remains strong while Japan and Western Europe's economies are growing at a reasonably healthy pace.

The London-based Numis Securities commented that metals prices appear "less driven by US economic growth despite it being one of the world's largest consumers. While a slowing US economy might have a longer-term negative impact, it would appear that prices are not implying a marked reduction in global GDP as China and Japan continue to display ongoing GDP growth".

If China sustains its phenomenon investment boom and if other major emerging markets like India and Brazil also continue to achieve brisk growth, mineral consumption will increase even faster in the coming years.

Sustained firm prices have boosted capital investment. Metals Economic Group estimated that miners last year spent $7.1bn on exploration and development (E & D) up from $5.lbn in 2005. By contrast, global nonferrous metals/minerals E & D budgets totalled only $1.9bn in 2002. The value of industrial metals production, at the mine stage, was estimated at $284bn, compared with only $81bn in 2002. Two metals accounted for over two-thirds of the aggregate: copper (41% of the total metal value) and aluminium (30.4%). The next most important metals were zinc and nickel at 12.5% and 11.4% respectively of the total mined value, followed by lead (3.6%) and tin (1%). The top-five mining companies--measured by share of total production--are BHP Billiton, Rio Tinto, Cia Vale do Rio Doce, AngloAmerican and Codelco, Chile's state-owned copper producer. In recent years, pension funds, insurance companies and speculative investors such as hedge funds have also boosted their investments in the metals sector. A survey conducted by Barclays Capital of 240 institutional investors found that assets under management in commodity products could total $150bn by end-2008, from currently $100bn.

"Commodity investment is more attractive than ever before because there are all the choices," says Barclays Capital, the British investment bank.

Copper

The world's number one industrial metal has been used by man for over 10,000 years. Copper, often called the 'red metal,' is used to produce the brass (a copper-zinc alloy) and bronze (a copper-tin alloy). Red metal boasts wider industrial applications because it is a powerful conductor of electricity and has strong corrosion-resistant properties. Thus electrical uses of copper represent 75% of total usage and building construction is the single biggest market.

Global land-based resources exceed 3bnt. The US Geological Survey estimated 2006 world mine production at 15.3mt and Chile remains the largest producer with 5.4mt, followed by the US (1.22mt), Peru (1.05mt), Australia (950,000t) and Indonesia (800,000t).

Africa's largest producer, Zambia, was ranked 10th with output of 540,000t, up from 249,000t in 2000. Zambia's share of world output is poised to expand over the medium-term. It has set a target of 1mt by 2011, according to President Levy Mwanawasa. Industry experts reckon that with 11 productive mines and 13 projects under construction, the African Copperbelt which covers Zambia and DR Congo could theoretically produce about 2mt of copper by 2013, if $7bn in project capital was invested. The region last year produced 650,000t.

Clive Newall, president of First Quantum, said: "The Copperbelt is not quite a new Chile, but it will become a very important contributor to growth in world copper supply." The quality of deposits in the Copperbelt is high compared with other regions. The International Copper Study Group (ICSG) envisages global supplies exceeding demand by 270,000t and 520,000t respectively this year and next. It predicts that world copper refinery capacity will surge by 3.8mt to 24.4mt by 2011, led chiefly by China and Chile. Annual mine production capacity is growing at 4.6% and is expected to reach 21.2mt by 2011. Africa and South America are envisaged as the main contributors to the increase.

On the demand side, the ICSG says: "Refined usage in China is expected to increase along with continued growth in India and Russia, while demand is expected to remain essentially unchanged for the EU, Japan and the US."

Copper prices averaged $6,754/t in the first-half, almost unchanged from 2006's average of $6,722/t. UBS, the Swiss investment bank, expects an 'equilibrium' price of between $6,000t and $7,000t in the short to medium terms.

Aluminium

Primary aluminium is a silvery, lightweight metal that is the third most abundant metallic element in the Earth's crust and constitutes 7.3% by mass. By volume, aluminium weighs less than a third of steel. This low weight ratio makes aluminium a popular choice for the construction of aircraft, automobiles and power cables. It is also used in cooking utensils and the pistons of internal-combustion engines because of its high heat conductivity.

Principal end-users are the packaging, building and auto industries, while other principal uses are in manufacture, aluminium foil and sliding doors and widows frames. The International Aluminium Institute reported 2006 world production, from some 120 smelters, at 23.86mt. Africa produced 8% of the world's total, or 1.86mt with major producers being Mozambique, South Africa and Egypt.

In Mozambique, aluminium accounts for a quarter of total exports. On a global scale, the top producers are China, Russia, Canada, the US and Australia. Barclays Capital thinks aluminium has firm demand/supply fundamentals and projects annual consumption growth of 4.2% over the long term. That would require 1.7mt of new capacity to satisfy growing demand. Aluminium in the first-half averaged $2,793/t, compared with 2006's realised price of $2,570/t. Goldman Sachs, the Wall Street bank, expects aluminium to trade between $2,100/t and $2,300/t in the long-term. It says: "China is less likely to provide nearly as much growth in capacity than in recent years. The long-term outlook remains supportive." Analysts forecast an 8mt-a-year supply deficit by 2010.

Alumina 

Bauxite is the raw material used for processing aluminium. About 4t of bauxite is needed to produce 2t of alumina, which in turn, produces It of aluminium. Worldwide bauxite resources are estimated at 55-75bnt, of which a third is located in the West African state of Guinea. According to the US Geological Survey, world bauxite mine production in 2006 totalled 177mt. Guinea was the fourth-biggest producer (15.2mt) after Australia (61.4mt), Brazil (21mt) and China (20mt). The International Aluminium Institute estimated 2006 alumina output at 58.39mt. Guinean production was a paltry 530,000t, although its bauxite exports (15mt-a-year) are equivalent to 8mt of alumina refining.

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This indicates substantial potential for developing a smelting industry in Guinea. Global Alumina Corporation in conjunction with Alcoa (US), Alcan (Canada) and RUSAL (Russia) is expected to add 5m/t of alumina refining capacity by 2009. Global Alumina has recently finalised an agreement for its $3bn alumina refinery with BHP Billiton, Dubai Aluminium Co and Abu Dhabi-based Mubadala Development Co. The new refinery, due online by mid 2010, will have a capacity of 3mt/year.

Zinc

Zinc is a bluish-white metallic element, the 24th most abundant element in the Earth's crust. It is never found in pure state but rather as zinc carbonate, zinc oxide, zinc silicate, as well as in minerals like franklinite and zincite.

Identified zinc resources, including those in Africa, are estimated at 1.9bnt. Zinc is mainly used for galvanising other hard metals, such as iron and steel and galvanisers consume about half of the annual zinc supply. The metal is also utilised as an alloy with copper to make brass and in medicines as an antiseptic ointment.

According to the US Geological Survey, world smelter production of zinc in 2006 totalled 10mt, led by China (2.5mt), Australia (1.4mt) and Peru (1.2mt). The International Lead & Zinc Study Group (ILZSG) projects 2007 global supply at 11.31mt, slightly below total usage (11.35mt).

World stockpiles are also low. Zinc prices in the first-half of this year averaged $3,561/t, compared to 2006's realised price of $3,271/t.

Nickel

The most expensive of industrial metals, nickel is a hard, malleable, ductile metal with a silvery tinge that can take on a high polish. It is mainly used in the production of stainless steel and other corrosion-resistant alloys. Nickel is also used to strike coins, replacing silver, in rechargeable batteries and in electronic circuitry.

World mine production in 2006 was estimated by the US Geological Survey at 1.55mt, up 4% over last year. The top-four nickel miners are Russia's MMC Norilsk Nickel, Cia Vale do Rio Doce, Xstrata plc and BHP Billiton. They control 50% of global production, which effectively creates an 'oligopoly' in the market.

The International Nickel Study Group (INSG) projects a 70,000t global surplus in 2007, with primary nickel supply and consumption pegged at 1.48mt and 1.41mt, respectively. Last year, there was a 30,000t supply shortfall.

About two-thirds of the demand for nickel is from stainless steel making, while nickel alloy and plating industries together account for a quarter of demand. According to the International Stainless Steel Forum, world production this year, led by Asian mills, could total 29.8mt (a new high) compared with 28.35mt in 2006.

Prices are supported by a higher off-take and depleting stockpiles. Last May, nickel became the only industrial metal to breach the $50,000/t level. But soaring prices make the metal vulnerable to substitutions. Thyssenkrupp, the largest stainless steel maker, warned it might increase production of nickel-free stainless steel and some producers have turned to manganese and nickel pig iron as substitutes.

Macquarie Bank, however, remains bullish on the nickel market. "China's booming demand has impacted the 10-year cycle and prolonged it into a 20-year cycle. The outlook for stainless steel and nickel will stay bullish for the next 15 years." Nickel prices, in the first-half of this year, averaged $46,230/t, up steeply from 2006's average of $24,254/t.

Lead

The world's identified lead resources are about 1.5bnt. Lead is mostly found in ore form with zinc, silver and copper and the most common lead ore is galena, containing 86.6% lead. One of the man's first known metals, over a half of the lead currently used in the world originates from recycling. The bluish-gray metal has many uses in the construction industry, for tank and pipe lining, storage batteries, electric cable sheathing and ammunition. Lead is also used as a protective shielding for radioactive material (e.g. x-ray apparatus), reflecting its high density and nuclear properties and is the main ingredient of solders, used for connecting metals.

Last year, world smelter production of lead (both primary and secondary) rose 3% to 3.36mt. China was the largest producer with 1.05m/t, followed by Australia (780,000t) and the US (430,000t). Its usage increases during summer months--historically a period of strong demand from the battery industry. Lead averaged $1,964/t in the first half of the year, up from 2006's realised price of $1,287/t.

Cobalt

Identified world cobalt resources are about 13-15bnt according to the US Geological Survey, the majority of which is in the sedimentary copper deposits of DR Congo and Zambia. The former holds over one-third of the world's known reserves of 5.4bnt.

Cobalt is a strategic metal with diverse commercial, industrial and military applications. The two largest uses are in superalloys used in the manufacture of aircraft engines, and rechargeable batteries. It is also used to make magnets, corrosion/wear-resistant alloys, high-speed steels, diamond tools, paints, varnishes and synthetic materials among other products.

In 2006, global refined production was 57,500t, led by DR Congo (22,000t), Zambia (8,600t), Australia (6,000t), Canada (5,600t) and Russia (5,100t). The two African producers accounted for 53% of total output. Metals consultancy CRU noted: "Demand from rechargeable batteries, superalloys and polyester will remain robust but high prices raise concerns about rates of future growth and substitution." It predicts cobalt demand could hit 100,000t a year by 2010. In early 2007, cobalt hit an 11-year high of $33/lb, fuelled by tight supply and strong Chinese demand. Higher prices should see more cobalt supplied from Africa.

Macquarie Bank said: "The supply side bears close examination, the projects that have been planned in the African copper belt include substantial amounts of cobalt."

Uranium

This yellow commodity is a dense, widely occurring mineral which is the main fuel for nuclear power. The mined product, uranium concentrate, is called 'yellowcake' oxide (a dark olive green powder) sold to power utilities. Uranium is a small, non-transparent market where a few mining houses and about 30-40 utility buyers negotiate supply contracts of up to five years.

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According to the World Nuclear Association (WNA), total uranium production in 2006 was 39,655t, down 5% on the previous year's total. Seven countries dominate the market, of which the largest is Canada with 9,862t or a quarter of the world's known supplies, followed by Australia (7,593t), Kazakhstan (5,279t), Niger (3,434t), Russia (3,400t), Namibia (3,077t) and Uzbekistan (2,270t).

The largest uranium miners are Canada's Cameco (which owns Niger's Akouta and Arlit mines), Australia's Rio Tinto (the owner of Namibia's Rossing mine), BHP Billiton and South Africa's Anglogold Ashanti.

Demand from the West's utility companies is rising because nuclear power generates electricity without producing carbon emissions, but supply of uranium oxide is scarce--reflecting low investments in new mines.

There are currently 442 commercial reactors worldwide with a total installed capacity of 370GW of electricity generated. A further 80 nuclear power plants are under construction or planned for completion over the next decade.

Last year, global uranium supplies were estimated at 108m pounds (lbs) versus consumption of 180m lbs. Supply inventories from mainly the former Soviet Union have now been depleted.

According to UX Consulting, a leading publisher of nuclear fuel prices, the spot uranium price reached a record $135/lb in early June. It was below $9 in 2002. Macquarie Bank believes "the bull market will continue for the next one or two years, at least". Some US power utilities are even factoring in prices of between $150-200/lb. Prices are also buoyed by investor interest--UX Consulting estimates that hedge funds are holding between 6,800t-9,070t, equivalent to 10% of world mine output.

The demand/supply balance looks likely to remain tight for the next few years because global stockpiles have fallen by a massive 800m lbs over the past two decades.

Tin

World tin mine output in 2006 fell 6% to 273,000t according to the US Geological Survey. The top-three producers are China at 36% of global production, Indonesia at 31% and Peru at 15%. Nigeria mines only a small quantity of tin.

For 2007, the International Tin Research Institute projects a supply deficit (40,700t) with global demand up 3.9% to 377,700t, but with mine production falling 4.2% to 337,000t. Barclays Capital remarked: "The strongest supply/demand story is in tin." Tin averaged $14,050/t in the first-half, up steeply from 2006's average price of $8,754/t.

Steel

According to the International Iron and Steel Institute (IISI), world crude steel production rose by 8.8% in 2006 to 1.24bnt, the highest annual crude steel output in history. The top-three steel making countries were China (418.8mt), Japan (116.2mt) and the US (98.5mt)--the equivalent of half of total global steel making.

The global trade in steel mill products was estimated at 283mt, compared with 250mt in 2005. China also topped the exporter list, with exports of 49.2mt, followed by Japan (34.2mt) and Russia (31mt). The top-three steel importers last year were the US (40.4mt), the 25 members of the EU (39mt) and South Korea (21.7mt).

The Brussels-based IISI says, "Growth will be particularly strong in Africa, Asia and South America in 2007 and 2008."

China's share of consumption growth (%)

           1993-2002  2002-05

Aluminium  38          48
Copper     43          51
Lead       42         110
Nickel     12          87
Steel      38          54
Tin        34          86
Crude oil  21          30

Source: IMF, World Economic Outlook, September 2006