Trading Base Metals On World Commodity Markets
Our world economy depends heavily on the production of base metals and the dynamics of supply and demand are watched closely by global commodity markets.
Some of these industrial metals like copper and lead have been known for thousands of years while others such as aluminium and nickel have only been discovered within the last 250 years or so.
Just reflect on the impact of the discovery of aluminium on global transport given its huge significance to aircraft manufacture.
You can now subscribe to the free Commodity Universe Ezine below, and get the latest articles on the commodity sector . Just your first name and email. It's as easy as 1-2-3! These base metals are integral to our daily lives such as when we get into our car, switch on the kettle, and turn on the computer, in fact, just about any activity we take part in today.
As the world economy moves through the business cycle there will be periods when supply cannot keep up with demand, and others when production is greater than refined consumption and metal stocks build up.
Well, first these metals have to be mined and that requires a lot of planning, capital investment and compliance with a long list of health and environmental regulations.
Infrastructure has to be brought up to standard and consideration has to be given to distribution, that is, where the mined metal is to be taken for smelting and how, either by rail or road or sea.
After mining the next stage is smelting, and this can often carried out in a different country.
These processes are energy intensive and so location can often be determined by where the cheapest sources of electricity can be supplied.
When the mining and smelting stages are complete there is a stockpile of refined metal, some held by the global metal exchanges, such as the London Metal Exchange (LME), and the remainder held by various countries.
Refined World Production and Consumption
The extent to which the supply or world refined production and demand or world refined consumption is out of equilibrium will largely affect the prevailing price of any particular base metal.
Add to this the sentiment of commodity traders on the global metal exchanges which is affected by release of various economic data or natural events like an earthquake or hurricane.
Other issues which can impact on industrial metals prices include labour disputes in mines in Chile or serious power shortages as has happened in South Africa.
A look at the 10 year trend in production, demand and stocks for base metals shows some interesting trends.
According to figures from the World Bureau of Metal Statistics (WBMS) (2007), global aluminium refined production increased by 56% over the 10 years between 1997 and 2006.
And significantly, China (9.3 million tonnes) produced more refined aluminium than the whole of America (North and South) (7.8 m t).
And what is a clear trend is the massive growth in refined aluminium consumption by the BRIC (Brazil, Russia, India, China) countries over this decade to 2006, surging from 3.76 m t to 11.55 mt (+207%).
Over this period while the BRIC countries showed strong smelter and refined production growth for copper, the USA recorded declines of 71% and 49% respectively in these sectors.
As with aluminium, consumption of refined copper is dominated by the BRIC nations, and in 2006 these countries consumed 5.17 m t (over 30% of world consumption).
A metal which has faced a number of challenges on the grounds of health and environmental concerns is lead, and yet the data show that this base metal still shows healthy demand growth, particularly in the BRIC states.
Lead world refined production growth was 33% in the decade to 2006, when it stood at 8 m t, of which the BRIC group supplied 2.94 m t (37%). World stocks of lead have fallen by a third over this period.
Nickel, which plays a significant role in stainless steel production, has seen a 30% increase in world mine production for the 10 years to 2006, according to WBMS. The main producer for nickel is the Russian Federation and yet this country has seen a 26% fall in refined consumption over the same period.
Given that the Russian Federation consumed only 26,000 tonnes of nickel, the bulk of its mined production (290,000 tonnes) was exported in 2006. Stockpiles of refined nickel fell 44% over the same period.
Interestingly, only China among the BRIC countries is a significant miner of tin, with 35% of total world mining production.
The other major mining producers are Indonesia (36%) and Peru (12%) who along with Bolivia (5%) and China make up 88% of the tin mined worldwide.
Zinc plays a big role in the auto industry with 47% of the metal used for galvanising steel. World zinc mine production increased by 37% to 10.13 m t for the 10 years to 2006. While only China and India of the BRIC nations make a notable contribution to mining output (34%), the other major producers are both in Latin America, Peru (12%) and Mexico (5%).
World zinc slab production increased 43% to 10.86 m t over the decade to 2006.
Clearly the WBMS data shows that the BRIC nations are increasing base metals consumption quite significantly to fuel the massive economic growth. Stocks of some of these metals have fallen a long way as supply fails to match demand. While occasional bottlenecks will occur, it seems the pattern is no longer cyclical but structural.
Add to this the report from Rio Tinto, in which the global mining giant forecasts demand for iron ore, aluminium and copper will double over the next decade, and we can see a huge challenge facing producers of base metals going forward.
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