David Hargreaves on Exchange Traded Metals

David Hargreaves

David Hargreaves

Call it a bounce if you like, but traded metal prices reacted as did the shares and exchange rates to the launch of that new confection, Euro Fudge. Even the numbers celebrated: copper transiently above $8000/t, lead nudging $2000 again, nickel $20,000. Will it last? It must come hard to realise your immediate future will be decided on how they behave on a beach in Greece or the shipyards of Shanghai but these are the drivers. There is no mood for hitting the high notes again but a least the dance floor feels less slippery.

Aluminum nudged up the statutory 5%. It is behaving like a cult religion, whose followers seriously believe in life hereafter. That they include Rio Tinto, Alcoa, Anglo must be noted, but let’s look at the facts. The malleable metal is in oversupply. Its warehouse stocks of almost 5 million tonnes equate to 45 days total world usage, compared with less than 9 days for copper. Its end uses are under threat too. Transportation takes almost 30% and that includes the skin and framework of aircraft. The recently flown Boeing 787 Dreamliner uses an awful lot of carbon fibre instead. The metal is also expensive to produce, being highly energy intensive. This prompts producers to ship the raw material, bauxite, to places where hydro-electricity abounds like Canada and the US Pacific northwest. That it has prompted Alcoa, the world’s 3rd largest smelter, to look at Angola (see Countries), smacks of suicide. Slightly less self destructive is an MOU signed between tiddlers Belzone (AIM) and Anglo Aluminum (TSX-V) in Guinea. That country holds the world’s largest reserves of bauxite and has massive hydro potential.

Copper - Exchange traded metalCopper. China will increasingly matter if the market ever resumes a semblance of normality. At the first China Metal Forum in Sweden organised by Raw Materials Group (RMG), a spokesman for Beijing-based consultancy Antaike said his country’s use of copper will not peak until 2020. They speak of 7% p.a. annual economic growth. In 2010, China topped the consumption table at 7.4Mt, or 39% world demand. At 7% pa growth for the next 8 years, that becomes 12.7Mt, a 28% increase in present world supply. Whether we like it or not, a lot of that will have to come from the DRC and Zambia. The case for copper is strengthened by worldwide disputes affecting the industry. They are hitting Chile (34% of world production), Peru (8%), Zambia (5%) and Indonesia (5%). In that country the giant Grasberg copper, gold mine of Freeport McMoran (No 2 producer at 10% world output) has been forced to declare force majeure on shipments because of very serious labour problems. These have escalated into violence and sabotage. These are pay-related problems. Grasberg is the world’s second largest copper mine.

Metal stocks in LME warehouse and commodity price movements

About David Hargreaves

David Hargreaves is a mining engineer with over forty years of senior experience in the industry. After qualifying in coal mining he worked in the iron ore mines of Quebec and Northwest Ontario before diversifying into other bulk minerals including bauxite. He was Head of Research for stockbrokers James Capel in London from 1974 to 1977 and voted Mining Analyst of the year on three successive occasions.

Since forming his own metals broking and research company in 1977, he has successfully promoted and been a director of several public companies. He currently writes “The Week in Mining”, an incisive review of world mining events, for stockbrokers WH Ireland. David’s research pays particular attention to steel via the iron ore and coal supply industries. He is a Chartered Mining Engineer, Fellow of the Geological Society and the Institute of Mining, Minerals and Materials, and a Member of the Royal Institution. His textbook, “The World Index of Resources and Population” accurately predicted the exponential rise in demand for steel industry products.

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