By Jack Farchy and Javier Blas in London
Published: October 13 2010 23:34
At the San José mine in northern Chile, the world’s attention is focused on workers being pulled out of the ground one by one after a spectacular rescue operation. Emerging to breathe fresh air after 69 days underground in the copper mine, Florencio Avalos, a 31-year-old father of two, was welcomed by a crowd chanting: “Chile! Viva Chile!”
Not far from the jubilant scenes at San José is the world’s largest copper mine, Escondida, where 20 years of digging have left a hole the size of downtown Manhattan.
But the mine, which at its peak in 2007 accounted for 10 per cent of global output, has seen its best days. Production is down 25 per cent since then, despite the best efforts of BHP Billiton, the world’s largest mining company, to widen and deepen the open pit, which is visible from space.
Escondida’s decline and the collapse of the San José mine are emblematic of the challenges facing miners. As consumption of industrial metals in China and other high-growth economies advances, seemingly unaffected by the financial crisis, mines developed in the boom of the 1980s are struggling to meet demand.
The result is higher prices, from tin – which yesterday hit an all-time record – and copper to ferrous minerals such as iron ore. The London Metal Exchange index of prices this week rose to its highest in two years, a level seen only for a few months during the 2005-2008 price boom.
The combination of resurgent demand and anaemic supply has reinforced the view that metals are in a “super-cycle”: a decades-long period of higher prices driven by the emerging middle classes in countries such as China and India as power behind the global economy shifts east.
“You’ve got a limited amount of metal in the earth and unlimited growth of population,” says Xavier Lannegrace of Société Générale. “It’s pretty obvious we’re in a super-cycle.”
Things were not always so clear. When prices collapsed two years ago during the financial crisis, some, including the World Bank, argued that the idea of a super-cycle had been a fiction of the metals industry.
Now the apparent return of the metals super-cycle is changing the economic landscape for everyone from small-scale miners in Congo to the governments of Chile and China.
For companies that produce and trade metals, it is stimulating booming profits and resurgent dealmaking. For consumers, the surge is denting margins and forcing them to re-engineer products to cut consumption of expensive metals.
It is also creating headaches for policymakers in consumer nations such as China, amid worries of rising inflation and security of supply, while simultaneously providing a windfall for large exporters such as Chile, Canada, Brazil and Australia.
Meanwhile hedge funds and pension funds are pouring money in the sector, and banks are rushing to develop financial products to meet their demand.
The boom will not affect all metals equally, however. Some, such as copper, are likely to advance faster than others. Aluminium production, for example, can easily increase to meet demand from the construction and aerospace industries.
The groundswell of optimism surrounding the metals markets comes in spite of concerns among mainstream investors about a double-dip recession in 2011. “People are getting a bit too bullish,” says Raymond Key, head of metals at Deutsche Bank. “The global economic recovery is still anaemic at the moment, so it’s anything but obvious that this should be a straight line.”
But mining executives brush aside such concerns. Diego Hernández of Codelco says his vantage point as chief executive of the largest copper miner has assuaged any caution. “We are quite optimistic on medium- and long-term demand.”
The clearest structural shift behind the rising metals prices – and the main reason behind the recovery after the drop in 2008-09 – is the growth of China. The rapid economic and industrial development of the world’s most populous country has made it the largest consumer of almost every metal. Its consumption of copper, for instance, has more than quadrupled since 1995, and its share of global demand has risen from less than 10 per cent to nearly 40 per cent.
Around the world, miners are having to move more and more earth to find the same amount of metal. Bad weather, strikes and other disruptions are further curtailing production. Just last week, PT Timah of Indonesia, the world’s largest tin exporter, said it would fail to meet supply contracts in 2010 as output would fall below expectations because of heavy rains.
Moreover, China is entering the most intensive phase of its growth in terms of metals consumption. As the middle class grows, demand for consumer goods is rising sharply. At the same time, Beijing has embarked in the construction of a vast network of infrastructure – from roads and railways to power cables and sewerage systems. Mike Frawley of Newedge, one of the largest metals brokers, says there is “no abatement in sight” for demand growth.
Fuelling the bullish air at this week’s London Metal Exchange gathering, the biggest of the industry, is supply. With the exception of aluminium, mine supply cannot keep pace with demand. For example, output from Chile, the biggest copper producer, is flat-lining after its 2007 peak, according to CRU, a consultancy, as the superstar mines discovered in the 1970s start to fade.
There is little prospect of change. It takes a long time for mining investments to pay off – the process of exploring, developing and bringing a deposit to market can last 20 years. The fact that companies slashed spending on exploration and development during the 2008-09 financial crisis to conserve cash means there are fewer new projects in the pipeline for the medium term.
It is becoming harder to reach the best deposits. With Chilean and North American copper veins, as well as Indonesian tin, on the wane, miners are forced to turn to countries such as Mongolia, Afghanistan and Congo. “There’s no doubt that the best resources in the first world have been developed,” says Evy Hambro, head of natural resources at BlackRock, one of the sector’s largest institutional investors. “The remaining best deposits to be discovered are in challenging locations – be they politically or physically challenging.”
The consolidation of the industry over the past decade, with the emergence of super-miners such as BHP Billiton, Rio Tinto and Xstrata that are interested only in large projects, has complicated the outlook. The big miners are likely to develop projects in series and not in parallel, says Martyn Whitehead, head of metals sales at Barclays Capital, slowing the arrival of supplies to the market.
Smaller companies are hampered by lack of access to credit. Banks, already cautious about lending, are reluctant to assume the super-cycle will last when making judgments about financing projects that will pay off over 50 years.
Another fundamental change for the industry is the attitude of governments to natural resources. Seeing the vast profits accruing to miners, they want a share of the spoils via higher taxes. Paul Robinson of CRU says governments are also demanding they pay for water, infrastructure, power and their environmental footprint. “Certainly a decade ago those costs weren’t being paid by the miner.”
The confluence of bullish factors means the super-cycle in metals is set to continue into 2011 – and beyond, according to the consensus among executives and traders during the LME week. “The consensus here is as positive as I’ve ever seen it,” says Richard Adkerson, chief executive of Freeport-McMoRan, the largest miner in the US.
At some point, of course, the boom will fade. But economists point out that the integration of large emerging economies into the global economy is unprecedented in scale so the refrain that “this time is different”, often heard from exuberant investors heading for a fall, may have a ring of truth. To find a similar super-cycle, they say, you must go back to American industrialisation of the late 1800s and early 1900s.
Shaun Roache, of the International Monetary Fund in Washington, says such cycles have typically lasted 20 years from start to peak. “Right now we’re probably somewhere close to halfway through, using historical averages as a guide.”
With little prospect of an increase of supply from mines, the most obvious potential restraint on prices would be the replacement by industrial consumers of metals with other commodities, notably plastics. In 2005-08, substitution played a fundamental role in capping copper and other prices. But Jim Lennon, an analyst at Macquarie in London, says “most copper substitution has happened” as companies have made the easiest replacements. The same is true of other metals.
Mines are not the only source of metal, however. Scrap, too, is important. Last year, it accounted for about a third of total copper supplies. In the boom of the 1980s, traders mopped up the scrap that had built up during the previous decade, when prices were low and demand lacklustre. But most experts warn that, after several years of extensive recycling, availability is much lower now.
Analysts and traders at banks and commodities trading houses believe that by the time of next year’s LME week some metals – particularly copper and tin – will trade at record highs. Goldman Sachs is predicting copper will hit $11,000 in 12 months – a 35 per cent rise from today.
But securing the metals remains an extreme enterprise. As LME week festivities progressed in London, engineers continued the painstaking operation of extracting each of the 33 miners trapped in Chile’s San José mine through the 622-metre shaft just wide enough to take a man.
For traders, miners and bankers alike, that is the best proof of the difficulties of supplying the metals necessary to sustain the global economy – and of the existence of a super-cycle.
THE CALL OF THE EAST
China may be the world’s biggest metals buyer but, when it comes to meeting and trading, London remains the industry’s capital city. China is wooing the industry to trade in Shanghai, which Beijing has designated as the country’s future financial capital. It is trying to persuade miners to price output out of contracts traded on the Shanghai Futures Exchange, China’s largest derivatives market. The industry is, however, reluctant, particularly as the market remains closed to foreigners.
THE A TO Z OF MINERALS
Aluminium
●Lightweight but strong. Used in aircraft, building materials, cooking utensils, electronics, food packaging.
●Most abundant metallic element in earth’s crust.
●Largest producers: China, Russia.
●Largest consumers: China, US, Japan, Germany.
●Leading miners: UC Rusal (Russia), Rio Tinto (UK), Alcoa (US), Norsk Hydro (Norway).
●2009 output: 36.3m tonnes.
●Current price per tonne: $2,430. Record price (July 10 2008): $3,380.
COPPER
● Effective conductor. Used mainly in electrical wiring and connections, as well as coins.
● First used circa 8,000BC as a substitute for stone.
●Largest producers: Chile, US, Peru, Australia.
●Largest consumers: China, US, Germany and Japan.
●Leading miners: Codelco (Chile), Freeport-McMoRan (US), BHP Billiton (Australia), Xstrata (Switzerland), Rio Tinto (UK).
●2009 output: 18.4m tonnes.
●Current price per tonne: $8,345 per tonne.Record price (July 2 2008): $8,940.
LEAD
●Malleable, ductile, resistant to corrosion. Used in batteries but no longer in plumbing and petroleum because of toxicity.
●One of first metals used by humans.
●Largest producers: China, Australia, US, Peru.
●Largest consumers: China, US, Germany and South Korea.
●Leading miners: BHP Billiton, Doe Run (US), Xstrata, Teck Cominco (Canada).
●2009 output: 8.7m tonnes.
●Current price per tonne: $2,370. Record price (October 11 2007): $3,890.
NICKEL
●Hard, malleable, ductile. Used in production of corrosion-resistant alloys such as stainless steel.
●Isolated in 1751 by Swedish mineralogist Baron Cronstedt.
●Largest producers: Russia, Canada, Indonesia and Australia.
●Largest consumers: China, Japan, US, Germany.
●Leading miners: Norilsk Nickel (Russia), Vale (Brazil), BHP Billiton, PT Antam (Indonesia).
●2009 output: 1.3m tonnes.
●Current price per tonne: $24,100. Record p
TIN
●Soft and pliable, it is used by electronics industry in solder and to coat steel food cans.
●Early mines found in Cornwall, south-west England, date back more than 2,000 years.
●Largest producers: China, Indonesia, Peru.
●Largest consumers: China,
●U.S, Japan, Germany, South Korea, Taiwan.
●Leading miners: PT Timah (Indonesia), Minsur (Peru).
●2009 output: 323,000 tonnes.
●Current price per tonne: $26,500. Record price (October 13 2010): $27,100.
ZINC
●Low melting point. Used in production of die castings in automotive, electrical and hardware industries.
●Essential to life, found in high concentrations in red blood cells.
●Largest producers: China, Australia, Peru.
●Largest consumers: China, US, Japan, Germany.
●Leading miners: Xstrata, Teck Cominco, Glencore (Switzerland), Oz Minerals (Australia).
●2009 output: 11.3m tonnes.
●Current price per tonne: $2,380. Record price (November 10 2006): $4,580.
Copyright The Financial Times Limited 2010.
0 comments:
Publicar un comentario