Price of some base metals have reached new highs

Tag : base metals
Despite describing base metals as a "mixed bag," Fitch Ratings hasmaintained a "stable" ratings outlook for base metals, citing somemetals prices that have reached new highs this year despite newsupply and weakening demand from the U.S. and Europe.
Noting that demand from China and other developing nations"continues to drive strong growth in consumption, Fitch analystsforecast that "price volatility, intensified by tight supply, isexpected to persist over the short-to-medium term."
Nevertheless, Fitch noted that constraints to mining company earnings persist including: declining ore grades; rising energy andfuel prices; capital, consumable and labor cost inflation; andincreasing governmental and non-governmental public action tocurtail production. Fitch does not expect costs pressures to easein the medium term.
"Persistent weakness in the U.S. dollar tends to adversely affectmargins, especially where costs are incurred in Australia, Canada,Brazil and Europe. By-product metal credits-particularly frommolybdenum or gold-should continue to strongly benefit earnings,"the analysts said.
Recent Chinese production cuts due to weather, an earthquake, powershortages, and curbing pollution up to and during the Olympics arenot expected to have a significant or lasting effect.
COPPER
Fitch expects copper consumption to grow about 4% over the next18-24 months. Copper supply is forecast to grow about 3% annuallyin the short run given continued production disruptions. Overallthe copper market should remain relatively tight over the next18-24 months.
"Prices could moderate further but should remain at historicallyhigh levels," Fitch predicted.
The analysts said, "The copper market, at 18.1 million metric tons(mt) in 2007, is exhibiting continued tightness in the face ofrobust demand from China, India and Russia; declining demand fromother industrial economies; and limited new supply." China, whichaccounted for 25% of international copper consumption in 2007,"should continue to show growth drive by the building of powergeneration facilities and the upgrading of urban infrastructure."
"Copper has been seeing demand destruction as a result of sustainedhigh prices and short supply," the analysts advised. "In particularthere has been substitution in plumbing applications with polyvinylchloride tube, and replacement by thinner-walled narrower tubes inair conditioning applications."
Aluminum can be substituted for copper in power cables andelectrical equipment, and optical fiber in telecommunications.Fitch estimated that 1 million mt of copper has been replaced byaluminum or plastics over the past five years.
Supply has been limited by strikes, natural disasters, decliningore grades and operating delays as production has undershotexpectations by 4% annually over the past four years and by 5% in2007. Additional production is expected this year from Codelco'sGaby (150,000 mt) and Andina (120,000 mt); Equinox Minerals'Lumwana (169,000 mt); and Oxiana's Prominent Hill (90,000 mt),according to Fitch
While copper production costs have benefited from moly, gold andother by-product credits, the analysts noted that "markets forconsumables are exhibiting tightness and very high prices." Forinstance, sulphuric acid contract costs have incr5eased at least$100/mt due to high fertilizer demand. Meanwhile cash costs are up10-cents per pound due to acid costs.
"On average production costs are up 60% over the past four years,"Fitch said, adding that capital expenditures have increased 45%during the past two years.
NICKEL
Fitch expects nickel prices to remain volatile, "but to trenddownward as new production comes on stream. Should prices remainbelow $10/lb. we would expect some supply destruction."
Primary nickel production is expected to increase steadily by 6%this year, according to Fitch.
In their analysis, Fitch said that new stainless steel capacityadditions in China are expected to drive strong nickel demand inthe medium term. Demand is expected to increase more than 6%annually over the next 12-18 months due to restocking as well asdemand from Chinese stainless steel mills.
ZINC
"Currently, the market looks to be in surplus, but may become morebalanced with reduced production or delays in development,"according to Fitch. For example, AIM Resources suspendeddevelopment of the Perkoa Zinc project in Burkina Faso until zincprices and financing improve.
"With the price declines over the past year and expectations of asurplus, some high-cost operations are expected to be shuttered,"the analysts advised, who also correctly predicted the decision toclose the Lennard Shelf Pillara zinc mine in Western Australia.Meanwhile, mines comprising an eventual total capacity of 235,000mt are scheduled for completion this year.
The analysts noted that zinc consumption through the month of Maythis year has increased 1% over the same period of 2007 despiteweakness in North America and an 8% decline in Europe.
ALUMINUM
Fitch expects aluminum demand and supply "to show a slightsurplus."
While aluminum consumption growth in China and other transitionaleconomies is expected to continue to be robust, energy use tomanufacture aluminum is now 40% of total costs. "Given thisdominance, the industry cost curve has been both rising andflattening, tending to underpin current prices," according toFitch.
South African and Chinese power production cuts on domesticaluminum manufacturing are expected to have an impact on overallglobal aluminum supplies.
The analysts produced the base metals report include Monica Bonarin New York, Sean Sexton in Chicago, Peter Archbold in London,Maurice O'Connell in Sydney, Su Aik Lim in Tokyo, Joseph Bormann inChicago, Giovanny Grosso in Santiago, and Priyamvada Balaji inMumbai.