Home

Metal News

Minor Metals

Metals Price Surge to Prompt Premature Restarts

Chinese Exports of Electrolytic Manganese Metal in Q1 of 2009

LONDON, June 12 --&nbsp;Surging prices for industrial metals in the belief that the global economic downturn is bottoming could encourage a wave of mine and smelter restarts, condemning some markets to longer periods of over-supply.
&nbsp;&nbsp;&nbsp; So far most reactivations have occurred in China's aluminium industry, but the trickle of announcements elsewhere may gather momentum soon for that metal and others too.
&nbsp;&nbsp;&nbsp; &quot;The danger applies to all metals. There is the temptation to restart with these higher prices, but producers would do better to wait to see how things are after the summer,&quot; said Will Adams of Basemetals.com
&nbsp;&nbsp;&nbsp; &quot;There's been no pick-up in real demand to warrant a pick-up in production,&quot; he said.
&nbsp;&nbsp;&nbsp; Some analysts single out aluminium as the most vulnerable. Zinc is also causing concern as smelters are due to review their cutbacks soon and can make money at these prices.
&nbsp;&nbsp;&nbsp; Metals consumption -- pummelled by the sharp contraction in demand from key sectors such as vehicles and construction -- is not expected to show clear signs of recovery until the final quarter of 2009.
&nbsp;&nbsp;&nbsp; And yet prices have surged, some with more fundamental justification than others.
&nbsp;&nbsp;&nbsp; Copper has risen 71 percent so far this year, helped by substantial Chinese buying, and reached a fresh eight-month high of $5,300 a tonne on Thursday. Even long-time laggard aluminium has rallied lately and at around $1,650 has moved into the plus column for the year.
&nbsp;&nbsp;&nbsp; But analysts believe rising supply poses a big threat to prices for that metal.
&nbsp;&nbsp;&nbsp; Aluminium is already contending with inventories in London Metal Exchange (LME) warehouses just off record highs at almost 4.3 million tonnes.
&nbsp;&nbsp;&nbsp; The market has taken heart from recent small stock falls and rising levels of metal earmarked for delivery out of warehouses. But it is open to question how long that will last.
&nbsp;&nbsp;&nbsp; &quot;If we see a pick-up in aluminium production I would expect to see stock builds gaining momentum again,&quot; said David Wilson, director of metals research at Societe Generale.
&nbsp;&nbsp;&nbsp; He estimated that 1 million to 2-1/2 million tonnes per year of previously idled smelting capacity had been restarted in China. Much more was laying in wait to come on line at the right price, on top of a huge amount of new production capacity.
&nbsp;&nbsp;&nbsp; Higher prices are helping producers' bottom lines for now.
&nbsp;&nbsp;&nbsp; Massimo Rossi, a senior analyst at industry consultants CRU Group, said just over one-third of global aluminium production is cash negative at current prices. This compared with 55 percent when prices were around $1,400 a tonne.
&nbsp;&nbsp;&nbsp; Very few, if any, zinc or copper producers are thought to be losing money with prices where they are.
&nbsp;&nbsp;&nbsp; SANGUINE ABOUT COPPER
&nbsp;&nbsp;&nbsp; Most analysts tend to be more sanguine about copper producers restarting idled capacity, partly because there were not that many price-induced curbs -- about 3.5 percent of global capacity, compared with around 15 percent in aluminium and zinc and almost 20 percent in nickel.
&nbsp;&nbsp;&nbsp; But also because supplies are deemed to be tight due to persistent non-price related disruptions such as strikes, equipment problems and falling ore grades.
&nbsp;&nbsp;&nbsp; However, zinc and nickel prices could be knocked along with aluminium if producers reverse their earlier decisions.
&nbsp;&nbsp;&nbsp; CRU Group's Graham Deller was concerned that zinc smelters would decide to reverse earlier curbs at the end of June.
&nbsp;&nbsp;&nbsp; &quot;Given that when they made the cuts the price was $1,100-1,150 and it's now over $1,600 and rising every day, there's no reason on earth why large numbers, if not all, won't come back in the second half,&quot; he said.
&nbsp;&nbsp;&nbsp; Resurgent nickel prices have also encouraged some higher cost Chinese producers of nickel pig iron to resume output.
&nbsp;&nbsp;&nbsp; Deller estimated cutback reversals in zinc could add 250,000 tonnes to the global market surplus this year alone, which, discounting Chinese stockpiling, he put at about 600,000 tonnes.
&nbsp;&nbsp;&nbsp; A lack of concentrate feed from zinc mines would be the only deterrent. But that may not prove to be a problem.
&nbsp;&nbsp;&nbsp; On Wednesday, HudBay Minerals said it could restart its Chisel North zinc mine in Manitoba if prices for the metal increase another 10 or 15 percent.
&nbsp;&nbsp;&nbsp; Producers restarting capacity might also take up contracts to sell forward metal at these higher prices and feel no compulsion to cut back again even if the demand was not there.
&nbsp;&nbsp;&nbsp; &quot;Prices would be sent back from whence they came,&quot; Adams said.
&nbsp;&nbsp;&nbsp; (Source: Reuters)