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the ringsiderLONDON METAL EXCHANGE

WELCOMING THE INSTITUTIONSThe positive role increasingly played by long-term investors

THE COPPER CONUNDRUMA unique set of market fundamentals is in play

METALS 2005

PLUS: EU legislation – REACH, MAD and MiFIDPricing reviews for all LME metals The dynamics of recyclingProduction – regional and sectoral trends LME Member directory 2005

LONDON METAL EXCHANGE

the ringsider

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THERINGSIDER 3LONDON METAL EXCHANGE

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the ringsiderEditor Peter Elstob

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A warm welcome from the chairman

Donald Brydon, LME chairman

Continuous innovation and improvement

Simon Heale, LME chief executive, introduces the new look Metals Week Ringsider

Relishing the challenges

Peter Elstob speaks to Patrick Birley, the LME’s new director of exchange strategy

LME news update

A round-up of LME news for 2005

The trend setter

Andrew Cole looks at future prospects for copper

Lower prices likely as supply rebounds

2005 will mark a major turning point in lead supply, Andrew Cole explains

High prices look fragile

Andrew Leyland reports on the outlook for the finely balanced nickel market

Supply looks secure

Andrew Cole looks at the likely path of the tin market in the coming months

A potential outperformer

Andrew Cole says the zinc market has the potential to outperform the rest

Market sentiment improves

James Salter explains that the outlook is generally good for aluminium

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Contents

THERINGSIDER 4 LONDON METAL EXCHANGE

Democratisation boosting production

Nnamdi Anyadike discusses opportunities created by recent developments in Africa

Bold investment response to firm price

Diana Kinch reports on new projects in the South American metals production arena

Appetite for base metal remains voracious

David Frensham looks at the strong demand for base metals driven by Asian growth

Claims of over-reliance on Chinese demand dismissed

David Frensham says Australia is optimistic about continuing industrial growth in Asia

Metals on the move

Paul Millbank explains where to look on your car to find the six LME-traded metals

Base metals benefit as developing economies mature

Robin Devereux reports on the increasing use of tin and nickel in electronic products

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Profits double for second year running

Sandra Buchanan says the metals mining industry is still enjoying a bonanza

A global transformation

Ken Stanford looks at the rapidly changing dynamics of aluminium smelting

Construction and transport underpinning growth in demand

Nnamdi Anyadike predicts steady growth in the market for extrusions

A thriving secondary market

Nnamdi Anyadike reports on the ever growing importance of recycling LME metals

Growing focus on sustainable development

Paul Scott explains how social and ethical issues are coming to the fore

Energy efficiency and environmental responsibility driving innovation

Robin Devereux looks at innovations developed in response to environmental challenges

Peaks and troughs of freight prices

Paul Bartlett reports on shipping rates and their contribution to price fundamentals

The copper conundrum

Jim Banks talks to market commentators about the fundamentals currently in play

EU Regulation – the road ahead

Jim Banks says firms must stay informed to make the most of new legislation – MAD,

MiFID and REACH

No pain ...

Basel II has left many commodity traders in need of answers, Jim Banks reports

Friend or foe

Jim Banks asks whether liquidity comes at the cost of price stability

Commodities as a new institutional asset class

Edward Russell-Walling looks at how the market is encouraging institutional investors

The ignored price driver

The short- and long-term impact of exchange rates on LME metals prices explained

by Bloomsbury Minerals Economics

LME member directory

Advertiser index

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CONTENTS


The LME continually seeks new opportunitiesin areas where it can add value and maintainits position as the world’s leading non-ferrousmetals exchange

THERINGSIDER

FOREWORD

9LONDON METAL EXCHANGE

DONALD BRYDON, LME CHAIRMAN, LOOKS BACK AT AN EVENTFUL YEAR FOR THEEXCHANGE AND FORWARD TO NEXT YEAR’S CHALLENGES AND OPPORTUNITIES

A warm welcome from the chairman

2005 has seen considerable activity at the Exchange. We have

launched two major new contracts for plastics, announced our

plans to explore steel futures, and have continued to develop our

existing metals contracts, thus remaining at the heart of the

international metals industry.

The last three years have seen unparalleled interest in

commodity investment, including metals, so that commodities are

now widely recognised by all corners of the investment

community as a credible asset class.

New interest has brought new liquidity to the market but it

remains a fact that the LME represents more than a mere ‘asset

class’ as it provides pricing, hedging and delivery services to the

physical metals industry.

We should never forget that LME metals (and commodities

more generally) are quite different from other investment classes:

they are tangible materials that the world needs and consumes on

a daily basis and they are interwoven into the fabric of everyday

life. It is equally important to remember that market participants

who would not class themselves as part of the physical metals

market are also indispensable to the functioning of the market

and the process of price discovery. Such participants, while viewed

cynically by some, provide liquidity and thereby facilitate the

activity of hedging.

In terms of markets, China has emerged as the fastest growing

consumer of commodities, closely followed by many other Asian

countries, such as India, Indonesia and Malaysia. All of these

countries are developing at an extraordinary rate and it is difficult

to predict whether these consumption dynamics are set to

continue. What they do reflect however is the start of a significant

global shift in the supply and demand of non-ferrous metals.

The LME continually seeks new opportunities in areas where it

can add value and maintain its position as the world’s leading

non-ferrous metals exchange. This may include new contracts but

it will also include reviewing and enhancing the services and

products currently offered so that they still meet the needs of the

industry and the investment community. Our committees, which

review all our contracts and services, play a key part in this and we

are indebted to them for their ongoing contribution.

This leads me onto the subject of steel. Having looked at steel

some time ago we met our commitment to revisit it after the

successful delivery of the plastics contracts. In May of this year

we established a Steel Group, that included representatives

from industry, to explore the feasibility and desirability of steel

futures contracts at the LME. The Group was charged with

reporting its findings to the LME Board at the end of October.

We will be looking to announce the outcome of this review

immediately thereafter.

I would like to welcome to the Board Michael Hutchinson and

Jim Coupland, who joined in March of this year as practitioner

directors, and Charles Stonehill, who joined in September as a

FOREWORD


non-executive director. My thanks also go to Andy Gooch, Clive

Stocker and John Poulter, who have all retired from the Board, for

their commitment and valued contribution to the LME. The Board

plays an important role in steering the future direction of the

Exchange and we are privileged to have such strong interest and

participation from all areas of industry.

In addition to the day-to-day running of the Exchange, we

have also had to deal with the impact on London of the terrorist

activity in July and with the devastating effects of Hurricane

Katrina in New Orleans, an important location in the LME-

approved warehouse network.

Throughout, we have had to make some difficult but

necessary decisions. The LME must at all times ensure an orderly

market to guarantee that the Exchange maintains its ability to

set the official global prices for the contracts that it trades. In all

cases I have been impressed with the professional way that the

LME members, and the wider industry, have dealt with these

incidents, and the fact that market order has been maintained

without interruption.

The strength of the LME resides in the trust placed in its official

prices – evidenced by the way in which the LME price is used by

all aspects of the physical industry. The LME is committed to this

always being the case and it is for this reason that we work so

hard to provide an orderly market: regulation and good

governance are at the heart of all our activities.

We all operate in a constantly changing business

environment, which means that staying informed of changes

and trends in the metals industry and trading community is a

continual challenge. It is one to which we are constantly

committed and the events of LME week and the seminar go

some way to achieving this goal.

I hope you enjoy the programme of events, and I look forward

to meeting with you and hearing your views during the week.

Regulation and good governanceare at the heart of all our activities

Every year is a busy year for the LME andthe last 12 months have been no different

THERINGSIDER

INTRODUCTION


Welcome to the new-look metals Ringsider, which is now an

annual publication published to coincide with Metals Week. The

new edition has undergone a radical redesign and includes more

articles than ever before. I hope that you will find it a useful

record of LME activity over the past year. It is complemented by

an equivalent annual publication for plastics that is available in

May, as well as four electronic updates throughout the year.

Every year is a busy year for the LME and I can say that the last

12 months have been no different, as we have maintained our

programme of educational seminars and international visits

while ensuring an effective and orderly market.

We launched two new plastics futures contracts on 27 May

2005. The two new contracts have a very different set of

requirements to metals, are aimed at an entirely new industry,

and were launched in just 18 months. This was achieved without

any substantial increase in resources and alongside ongoing

enhancements to existing contracts and the day-to-day running

of the Exchange. That in itself is a great achievement and

testament to the valuable contribution made by all those

involved in the launch; the LME Plastics Committee, our member

firms, LME staff and the plastics industry itself. I am very grateful

to all of them.

The launch of plastics futures contracts demonstrates that, as a

relatively small exchange, we are able to identify a new

SIMON HEALE, THE LME’S CHIEF EXECUTIVE, INTRODUCES THE NEW-LOOK METALS WEEK RINGSIDER

Continuous innovationand improvement

opportunity in the market place, and are capable of doing all that

is necessary to make it happen in relatively short timescales. This

does not diminish our commitment to the base metals industry

in any way; in fact it reinforces it. We have learned a huge amount

in the development of these contracts, and this experience will

be reapplied to our current metals contracts as we continuously

look to innovate and improve our existing services.

Trading in the plastics contracts has so far been light, but

steady, with prices moving in line with the physical market, which

is an encouraging sign at this stage. It will take time for the

plastics industry to accept LME pricing, and to use it for hedging

and as the basis of their physical transactions. Plastics contracts

may be the first major new contract that we have launched for

several years but they are intended to be just the start of a range

of exciting projects, and new contracts, which, over time, we hope

to bring to market.

Our ability to launch the plastics contracts is derived from the

strength of the current management team, which itself has seen

some changes in the past year. Patrick Birley, who joined us in

May 2005 as director of exchange strategy, brings a wealth of

experience in the area of financial markets which will prove

invaluable in driving forward the future strategy of the Exchange.

Patrick’s new role, combined with that of Neil Banks as director of

exchange development, offers the Exchange greater scope to


INTRODUCTION

explore new opportunities whilst implementing existing projects

and innovations. I am also delighted to welcome Liz Milan, who

joined us in January 2005 as head of physical operations and

Alex Morley who joined us in March as general counsel and head

of enforcement.

Further evidence of a buoyant year for the LME, and the

commodities market as a whole, can be seen in the new

members we have welcomed to the Exchange. The last six

months have seen the approval of three new category two

members, Credit Suisse First Boston, UBS and Bear Stearns. This

interest in the LME is encouraging and helps to reinforce our

position as the world’s leading market for non-ferrous metals.

In April we began to publish, for the first time, prices and

volumes for matched trades in the ring and kerb sessions, and

the inter-office telephone market between brokers. The LME

already publishes real-time ring and kerb trading prices, and will

continue to do so. This new information adds further to the

transparency of the market, and is the result of detailed

consultation with LME members and the FSA.

Our commitment to innovative technology has also continued

this year. In the autumn we announced two new developments

to further enhance our electronic trading platform, LME Select.

This includes enhanced functionality to allow member firms to

build bespoke ‘front-end’ systems for their clients to route orders

into Select and access Select prices and data for the first time.

The Exchange is also exploring the extension of Select

opening hours to better synchronise with Asian trading times. We

still need to satisfy a number of operational and regulatory

requirements before we can proceed, but our intention is to have

them implemented in 2006.

Finally, there has been much talk this year about LME stocks,

particularly as we saw copper stocks decline to a level not seen

for several decades. Now is probably a good time to reflect on

the purpose of LME stocks. They are an indication of the market’s

supply and demand and they do not, and cannot, take into

account the large stocks of metal not held on LME warrant. There

have been times in the past when stocks of other metals have

been relatively low. We have seen it this year with copper, but the

LME has always maintained an effective and orderly market.

In all cases history has proved that the basic fundamentals of

supply and demand ensure that when the market is tight, rising

prices attract material and result in LME deliveries into

warehouses, and this ultimately restores the balance. That said,

we are always monitoring the market and talking to market

participants. Through our Lending Guidance, and the powers of

the Special Committee,

I am confident that the Exchange has sound mechanisms in

place to ensure that the market remains orderly and effective at

all times, regardless of high or low stock levels.

Our commitment to innovativetechnology has continued this year

PETER ELSTOB SPEAKS TO PATRICK BIRLEY, THE LME’S NEW DIRECTOR OF EXCHANGE STRATEGY

Relishingthe challenges

INTERVIEW


The LME’s new director of exchange

strategy understands derivatives

exchanges extremely well, having been

one of the first involved (in 1989) and

from 1999 to 2002 the CEO of SAFEX, the

South African Futures Exchange (SAFEX),

now a very successful division of the

Johannesburg Stock Exchange. Patrick

Birley’s experience there of developing a

multiplicity of new products in a newly

opened market means that he brings the

eye of a clean-sheet innovator to the

established business that is the LME. He

also brings a wealth of knowledge and

experience of reference pricing from his

two years as global operations director of

FTSE International Ltd.

“I think what I contribute to the LME is

an intimate knowledge of how derivatives

exchanges operate, not just from my

SAFEX experience but from having spent

those 13 years mixing extensively with

other newly developed markets around

the world,” he says.“Where I’m probably

least knowledgeable is the non-ferrous

metals industry itself, but there is so much

internal expertise within the Exchange

that I think I add something different to

the mix of the senior management team.”

Birley is responsible for the

development of the Exchange’s strategy

and so he carries some of the

responsibility for ensuring that the LME

rises to the challenges that stem from the

Exchange’s dominant position in the

metals industry.

“In the last five to ten years, the pace of

change among exchanges has picked up

dramatically, and so my responsibilities

include making sure the LME is looking at

the threats and opportunities and that we

have a realistic and sensible development

Number 56 Leadenhall Street? “I’ve

certainly been made to feel thoroughly

welcome, not only by the management of

the Exchange, who have been very open

to new ideas, but also by the Exchange

members’ representatives,” he says.“Not

having come from an open outcry

background, my main priority when I first

arrived was to spend as much time as

possible down on the floor, trying to

understand the dynamics of the Ring and

how it operates. I spent quite a long time

talking to the Ring members, trying to

understand their concerns and how they

THERINGSIDER

INTERVIEW


plan for moving the Exchange forward.”

He describes his initial tasks as

integrating himself into the LME

organisation, looking at where the LME

is different, and gaining an

understanding of its idiosyncrasies

relative to other exchanges.

“Obviously the LME is different, not

only in terms of being metal- (and more

recently plastics-) focused, but also in

terms of things like its dates structure

and its multiple trading mechanisms. It

is also unusual these days in being a

not-for-profit exchange,” Birley points

out. An understanding of the dynamics

of these features of the LME is, he

believes, necessary before strategic

planning can begin.

“The approach I am taking to strategic

development means that at the moment

we’re spending a lot of time looking at

macro issues.What does the Exchange’s

structure look like? Where are we different

to other exchanges? Are those differences

positive, negative or neutral? Where do we

want to be positioned in terms of those

factors in the three to five year time scale?”

What were his first impressions of

THERINGSIDER

INTERVIEW


see the LME; from a trading point of view,

from a product point of view and also, as a

lot of our members trade on other

exchanges, how they view us in the

broader perspective; where the LME is

better, worse, different.”

Following this period spent with the

floor traders, Birley has been talking to

Exchange board members and some of

the senior personnel at LME trading firms.

In the early stages of this steep learning

curve, he says, these contacts were

relatively unstructured.“I was trying to

listen to their views rather than talk.” More

recently, the process of his

communications with both groups has

become more structured and more two-

way.“I have a little more of a response to

give to some of the issues raised,” he says.

The exchange employs some 70 people,

so it is a small company.“Maybe, but it’s a

huge business. I’ve been struck by the

power of the LME brand. When I told

people I was coming to join the Exchange,

no matter which part of the world they

came from they knew the LME, what it did,

and could probably quote you the copper

price.”The perception of the size of the

LME, he says, is not determined by the

number of staff employed but the

business volume done.

Like the LME, SAFEX, where Birley spent

13 years, was a not-for-profit organisation.

“Clearly, where your members are also

your largest customers, and where they

may have lots of contrary views, and have

come to the market for different reasons,

trying to find – not a consensus, which

you’ll never find – but a reasonable thread

of similar views on what the Exchange’s

future direction should be, will be key to

guiding the LME in terms of the decisions

it needs to take.”

So what are the opportunities he sees?

The advent of the two new plastics

contracts predate his arrival at the

Exchange, as do ongoing plans for a

possible steel contract, but a major part

of his role will clearly involve looking at

new opportunities.“While I will certainly

be keeping an eye on what other

exchanges are doing, and whether the

moves they are making are things we

should emulate, I will also be thinking

about moving into first-mover space,” is

all he is prepared to say.

“Some people feel that, because of the

dominance the Exchange enjoys in its

markets, we may have exhausted the

existing volumes in the products we offer.

I’m not convinced of that, and I’m

unconvinced that there are not some

fantastic opportunities to do more business

in our existing products.”

He says many exchanges have a

tendency to spend a lot of time and money

searching for new products and so losing

focus on their existing products and how

they may be improved to generate greater

business.“I think the LME is showing that it

can look at its existing products and can

see how their use to both member firms

and clients can be increased, and this is not

a bad starting point.”

He welcomes the trend towards the

involvement of financial players in the

metals market.“A part of what I hope to

bring is a focus on financial markets and

financial users of derivatives products; my

experience at FTSE International was of

working with traditional investors like

pension funds as well as new investment

vehicles, whether hedge funds or

commodity funds.”

He strongly believes the important role

of these financial players needs to be

recognised and encouraged.“We need to

make sure that we’re not only satisfying

the needs of the producers and consumers

of metals but also the needs of financial

players who are here adding liquidity. We

are, after all, here to provide a well-

regulated, orderly market place, So

whether you’re a long-only fund, a hedge

fund, a commodity fund, or a producer or

user of metals, you come to the LME

because you know you can trade a well

defined product in a regulated

environment where you’ll get a fair current

market price, and where you will receive

good-value settlement through our

settlement mechanisms. That’s what we’re

here to do, and we want to make sure that

we can do it to the satisfaction of all users.”

As for trading systems, Birley says his

impression as a newcomer from a solely

electronic exchange is that the LME’s

three platforms – the open outcry floor,

its electronic platform, LME Select, and

telephone trading – appear to be

working well together.

“Part of what I have to look at is what

it should look like in the years to come.

But we are driven by the members, and

“My main priority when I first arrived was tospend as much time as possible down onthe floor, trying to understand the dynamicsof the Ring and how it operates”

INTERVIEW


development of LME Select, with the

opening up, towards the end of 2005, of its

interface facility (Application Programming

Interface – API) “What we’re doing is giving

our members more opportunity to give

their clients better access to LME prices.”

The move does not represent a switch

to direct access for non-members,

however, and, as with all exchanges’ APIs,

business done through the interface still

involves the member firms and is subject

to the usual regulation.

The important thing about all product

development, Birley believes, is working

closely with both existing and potential

users.“Very often the difference between

success and failure is marginal, and we are

trying to make sure the specifications of

our products are such that they are

delivering to clients the risk management

tools they want.”

given the way the Exchange is

structured and the way it operates, I

don’t think we are going to be forcing

the issue of the platforms we offer, as

some other exchanges have done, and

hopefully that is a message we’re

getting across clearly. If the members

want to use the floor, we will provide the

floor, and similarly the electronic

platform and telephone trading.”

One of his initial projects involves the

Career Factbox:

1984: Claims Consultant, Willis Faber & Dumas

1984-1988: Senior Consultant, Resource Evaluation

1988: Consultant, Hunter Produce Ltd

1989-2002: South African Futures Exchange (SAFEX)

• 1994-1997 – General Manager

• 1997-1999 – Senior General Manager

• 1999-2002 – Chief Executive Officer and Managing Director, SAFEX

Clearing Company

2002: Consultancy – Financial Markets

2003-2005: Operations Director, FTSE International Ltd

2005: Director of Exchange Strategy, London Metal Exchange

“We need to make sure that we’re notonly satisfying the needs of theproducers and consumers of metalsbut also the needs of financial playerswho are here adding liquidity”

January

The Exchange introduced new deliverable shapes for its

aluminium alloy contract on 25 January 2005. In addition to the

ingots currently traded, the contract has been extended to include

small sows, large sows and T-bars as deliverable against the

contract. Lots and Warrant sizes will remain at 20 tonnes.

The introduction follows a recommendation from the LME’s

Aluminium Committee, which includes representation from across

the metals industry, and brings the contract into line with the

shapes currently traded on the successful NASAAC contract

introduced in 2002.

Commenting on the introduction, Neil Banks, LME director of

strategy said:

“Our contracts are constantly evolving in response to the needs of

industry.The introduction of these new shapes brings consistency

across our aluminium alloy contracts, offers greater flexibility for

producers and so will enhance the liquidity of the contract.”

March

Michael Hutchinson, deputy chairman of Sempra Metals Group,

has been appointed to serve as a Ring Dealing Member (RDM)

representative, and Jim Coupland, head of metals at Standard Bank

has been appointed to serve as an Associate Broker Clearing

Member (ABCM) representative. Both will also sit as directors on

the board of The London Metal Exchange Limited.

Clive Stocker, associate director, metals and mining at

Macquarie, and Andy Gooch, managing director, derivatives

markets at Calyon Derivatives, will retire from the board of LME

Holdings Limited at the next AGM, planned for 1 April 2005.

Commenting on the appointments today, Donald Brydon, LME

chairman said:

“I am delighted to welcome Jim Coupland and Michael

Hutchinson to the board. They both bring a wealth of industry

knowledge and we are privileged to have such strong interest and

participation in the future direction of the Exchange. I look forward

to working with them.

I would also like to extend my thanks, both personally and on

behalf of the LME board, to Andy Gooch and Clive Stocker for their

valuable contribution, service and commitment to the LME.”

THERINGSIDER

LME News


January

Total lots traded for 2004 was over 72 million, maintaining the

record levels reached in 2003. Most significant in growth was the

NASAAC (North American Special Aluminium Alloy Contract), with

1,192,100 lots traded, up 43 per cent on 2003 figures. Primary

Aluminium also showed year-on-year growth of 8.5 per cent and

traded options grew by 32 per cent on 2003 figures (4,612,216 lots).

Commenting on the results, Simon Heale, LME chief executive said:

"I am delighted that we have maintained the record volumes

achieved in 2003. These results are incredibly encouraging and

demonstrate the excellent liquidity on the Exchange. They further

reinforce the dominant role we play, and intend to continue to

play, in the base metals market.

The growing success of the NASAAC contract is testament to the

LME’s ability to work closely with industry to launch successful

new contracts which meet the needs of the market."

A ROUND-UP OF LME NEWS FOR 2005

LME news update

Full year volumes

Shareholder representativeelections held

January

Liz Milan is appointed new head of physical

operations at the LME, following the departure

of Mike Cotterill who left the Exchange, as

planned, in the middle of 2005 at the end of his

long-term contract.

Commenting on the appointment, Simon

Heale, LME chief executive said:

"Physical operations and warehousing are core to the success

of the Exchange and Liz's experience and qualities will ensure

that we manage, develop and enhance our capabilities in these

areas. Indeed, her knowledge of working within a member firm

will be invaluable."

Liz most recently held senior trading positions at Sempra, Enron

and Uvisco. She is FSA approved and holds a BSc (Hons) in

Biotechnology from University College London.

Aluminium alloy – new deliverable shapes introduced

New head of physical operations

May

Trading of plastics futures contracts, for polypropylene and linear

low-density polyethylene, commenced on 27 May at The London

Metal Exchange (LME).

Futures contracts will enable the plastics industry to hedge

against volatile polymer prices for the first time. The industry will

additionally benefit from a globally recognised price,‘discovered’ in

a transparent and well-regulated environment, which can be used

as the basis of physical supply contracts.

Commenting on the launch, LME chief executive

Simon Heale said:

“The plastics industry has suffered from extreme price volatility

for many years with, to date, no price risk management tools. These

new contracts will enable the industry to manage price risk

effectively, to better forecast profits and so concentrate on its drive

for innovation.

I am delighted to confirm that the trading of plastics at the LME has

begun. I believe that, with the LME’s experience and reputation, we are

ideally positioned to ensure that these contracts are a success.”

THERINGSIDER

LME News


May

The London Metal Exchange (LME) confirmed that it has

established a Steel Group, which will advise on the feasibility, and

desirability, of launching steel futures on the Exchange.

The Group will report to the LME Board with its findings, to be

delivered in October 2005.

Commenting on this announcement, Simon Heale, LME chief

executive, said:

“The steel industry has been in need of reliable risk management

tools for a number of years now, and the Exchange has already

gone some way towards investigating its requirements.

This announcement formalises our commitment to review the

feasibility of exchange-traded steel futures.”

LME to investigatefeasibility of launching steel futures

New independentdirector appointed to LME Ltd board

September

Three new Category 2 members have commenced trading on the

Exchange this year. These are Credit Suisse First Boston and Bear

Stearns International Ltd in July, and UBS in September. This brings

the total number of Category 2 members on the LME to 26.

Three new Category 2members on the Exchange

Trading of plastics futurescontracts begins

August

The London Metal Exchange (LME) has confirmed that Charles

Stonehill has been appointed as an independent director on the

board of London Metal Exchange Limited. His appointment will

take effect from 1 September 2005.

Charles Stonehill will replace John Poulter, who retired from the

board on 31 July 2005, and who has been an independent director

since November 2002.

Commenting on the appointment, Donald Brydon, LME

chairman said:“I am delighted to welcome Charles Stonehill to the

LME board. He has wide experience and extensive industry

knowledge of the finance and investment sector and the

Exchange will benefit from this new, additional perspective. John

Poulter has been a valued member of the board for three years

and I would like to thank him for his contribution, service and

commitment to the LME during that time.”

May

Patrick Birley joined The London Metal Exchange (LME) as director

of exchange strategy on Monday, 3 May 2005.

Commenting on his arrival, Simon Heale, LME chief executive said:

“I am delighted to welcome Patrick to the London Metal

Exchange and I look forward to working with him.

“Patrick has extensive experience and knowledge in the area of

financial markets which will prove invaluable in driving forward

the future strategy of the Exchange.”

LME appoints a director of exchange strategy

“Our contracts areconstantly evolvingin response to theneeds of industry”

METALS MARKET FUNDAMENTALS: COPPER

THERINGSIDER 26

THROUGHOUT THE BASE METALS BULL RUN TO DATE, IT HAS BEEN COPPER THAT HAS LED THE REST OF THE LME COMPLEX, WITH SENTIMENT IN THIS MARKET OFTEN HELPING TO SHAPE THE FORTUNES OF THE OTHER MARKETS. ANDREW COLE LOOKS AT FUTURE PROSPECTS FOR THE TREND-SETTING RED METAL


The trend setter

Copper mine output has beenexpanding at a phenomenal rate

THERINGSIDER



Copper was exposed to a raft of price-

bullish factors through the second half of

2003 and during 2004, which combined to

engineer a spectacular rally to record price

levels in nominal terms.

A major factor was a series of

unexpected actual and potential supply

disruptions. Accidents, technical

difficulties and labour disputes at different

times over this 16-18 month period closed

or threatened to close almost 6 million

tonnes per year (tpy) of copper

production capacity in total – equivalent

to almost 40 per cent of the total global

supply base. These developments

coincided with sharply increasing demand

in Western World economies and still-

booming Chinese demand; indeed, supply

fell short of demand by more than 1

million tonnes in 2004.

The result was that the market was

forced to turn to inventories, which were

quickly drawn down to historically critical

once again it did not play out according

to the script and instead we found the

market playing out analysts’ high-case

scenarios, with a series of new record

highs – edging ever closer to

$4,000/tonne. So what changed?

Again, the supply side of the market is

at the core of the issue. Unquestionably,

copper mine output has been expanding

at a phenomenal rate, as previously idled

capacity has been restarted, new capacity

has been commissioned and throughput

has been maximised (at least until

recently). Furthermore, mine output will

continue growing strongly in the next few

years as a host of new projects are

brought on stream, and it is this

aggressive supply growth that will

eventually swing the copper market into

surplus and ultimately drag prices down.

However, 2005 has seen a bottleneck

develop at the smelter level of the supply

chain, due mainly to a large number of

levels, and lower, as consumers with full

order books were forced to scramble for

metal. Another key factor was a prolonged

phase of US dollar weakness, which also

served to boost buying from fund and

trade participants alike.

By the end of 2004, LME cash copper

prices were touching $3,300/tonne and

three-month copper was trading around

$3,150/tonne, both up from a range of

$1,600-1,700/tonne in mid-2003.

Unsurprisingly, physical premiums had

gone through the roof too, as global

inventories slipped to less than two weeks

of consumption.

At the beginning of 2005 the script for

the year was that the aggressive

rebound in supply that had already

started in 2004 would accelerate further,

demand would cool – at least in the

West – and that by mid-year the market

would be balancing, with prices at or

already passed their peak. However,



maintenance closures. It is this hold-up in

the processing of concentrate that has

kept the refined market so tight and kept

prices buoyed at high levels for so long.

Furthermore, the effect of this smelting

bottleneck was exacerbated in the first

half of the year by yet more unforeseen

disruptions. These have taken the form of

another round of strikes, more accidents

and, most recently, widespread low-

grading activity by a surprisingly large

number of major miners as they target

molybdenum/gold-rich ore at the

expense of copper – or perhaps seek to

purposefully prolong tightness in the

market.

Clearly these factors have major

implications, as the massive supply

rebound that consensus forecasts are built

on is not progressing smoothly and will

not be so massive after all. Admittedly,

smelters have still been able to build up

large concentrate stockpiles this year, and

once the processing bottleneck has been

worked through this will lead to higher

cathode production over the next six to

12 months, as capacity utilisation ramps

up from its still lowly 80 per cent level.

However, if concentrate supply is choked

off again by a widespread – and co-

ordinated? – low-grading ‘event’ and by

further unplanned disruptions, the refilling

of the supply pipeline and the rebuilding

of exchange stocks will take much longer

than first thought.

This will certainly be the case if demand

re-accelerates sooner rather than later as it

now appears set to do, following a run of

bullish economic and sector-specific data

for the US, China, India, and Eastern

Europe especially. Indeed, a particularly

strong fourth quarter in terms of

manufacturing activity, and hence copper

consumption, is now expected, although

just how strong it is will to a degree

depend on the impact of high oil prices, a

worrying downside risk.

Nevertheless, the outlook for copper

has become much more bullish, from

both a supply side perspective and a

demand side perspective, and Metal

Bulletin Research (MBR) has recently

made significant upward revisions to its

price forecasts. This is based on there

being a much tighter market this year

and a much smaller surplus in 2006 than

previously anticipated.

Indeed, rather than the global refined

copper market swinging into surplus in

the second half of 2005, MBR is now

expecting to see another sizeable net

deficit in the second six-month period,

and through the year as a whole.

However, it should be made clear that

while the refined market will remain

tight for now, concentrate stocks are

already approaching 500,000 tonnes.

This material will work its way through

to the refined market in 2006 and

contribute to a surplus in the order of

300,000 tonnes.

It follows that it may not be until then

that the long process of rebuilding

stockpiles will begin; and, by then, it will

be from an even lower starting point

than now.

Therefore, given that acute tightness

will continue to be a feature of the

market for the rest of 2005 at least, prices

are likely to remain volatile, in a steep

nearby backwardation, and favouring an

upward bias. The record highs achieved

to date – $3,825/tonne official LME cash,

and $3,607/tonne official LME three-

month – are likely to be bettered before a

top is finally called. Therefore, following

an LME average cash price of

$2,868/tonne in 2004, MBR is now

forecasting $3,454/tonne in 2005 and

$2,950/tonne in 2006.

Andrew Cole is Senior Base Metals Analyst,

Metal Bulletin Research

the outlook for copper has become muchmore bullish, from both a supply sideperspective and a demand side perspective

THERINGSIDER 30

ANDREW COLE REPORTS THAT 2005 WILL MARK A MAJOR TURNING POINT IN TERMS OF LEAD SUPPLY, THE FIRST YEAR SINCE 2000 THAT WESTERN WORLD LEAD PRODUCTION WILL HAVE RISEN


In the summer of 2003, just before the

base metals bull market took off, lead was

trading on the LME at less than

$500/tonne, not far off its cyclical lows set a

year earlier. However, by the end of 2004,

the market had touched the magic

$1,000/tonne mark, with a last-gasp rally on

the very final day of the year seeing cash

settlement prices peak at $1,056/tonne and

official three-month prices peak at

$1,011/tonne – unprecedented levels for

the LME lead contract.

In hitting these heights, lead just

pipped copper as the star performer of

2004, gaining 41 per cent in value

Lower prices likely as supply rebounds

compared with copper’s 40 per cent. For

lead, this came on the back of claiming

runner-up position in 2003 following an

impressive 76 per cent increase that year.

Such a strong performance has been

due to acute tightness in this market,

brought about by a raft of smelter

closures in 2003, plus a string of

unplanned supply disruptions through

2004 and 2005 that hit leading producers

in Europe, North America, Latin America,

Asia and Australasia. Furthermore, the

impact of these wide-reaching supply

problems was exaggerated by the fact

that they coincided with booming

demand in China – soon to overtake the

USA as the world’s number one lead

consumer as it cements its position as the

principal manufacturing base for both

automotive and industrial batteries.

However, at the beginning of 2005 lead

prices corrected lower from the over-

bought levels of their late-2004 peak, and

although cash quotes revisited the

$1,000/tonne landmark briefly a number

of times throughout the first half of 2005,

these highs were never surpassed.

Furthermore, the steep nearby

backwardation has begun to unwind as

more metal has become available and the

METALS MARKET FUNDAMENTALS: LEAD

THERINGSIDER



market has started to drift lower.

Lead is part of a group of LME metals

for which exchange stocks fell to

exceptionally low levels in the first half of

2005 (to just one or two days of world

consumption) and it is these metals,

which also include copper, nickel and tin,

that have seen the strongest price gains

through the bull run of the last couple of

years. The similarity does not end there,

as high prices and tight supply are

driving an aggressive increase in

prices will start to drop back –

aggressively so if inventories build up

quickly. Of the four markets that found

themselves on the edge of this precipice

during 2005, tin was the first to start its

price correction, but lead has now started

to follow. After trending gently sideways

to lower over the second quarter of 2005,

lead finally took its first significant steps

downwards in July, slumping by almost

$200/tonne in the space of four weeks to

the low $800s for the first time in a year.

production in all of these markets.

Although for each market this supply

rebound is at a slightly more or less

advanced stage of its evolution at the

present time, the flow of new metal is

now undeniably beginning to be felt and

these markets, including lead, are

correcting back to balance and will swing

into surplus in the coming years.

When the supply pipeline starts to fill

noticeably and stock levels start

returning to more comfortable levels,

Lead finally took its first significant steps downwards in July,slumping by almost $200/tonne in the space of four weeks


This is seen as the beginning of a long

descent that could ultimately lead back

to a trading range beneath $700/tonne

in 2007.

The final straw that brought an end to

lead’s uptrend was the arrival of

substantial tonnages into LME

warehouses throughout June, July and

into August 2005. To the time of writing,

lead stocks on the exchange had

returned above 60,000 tonnes for the

first time since May 2004, which was

more than double their cyclical low of

29,700 tonnes in May 2005, and 50 per

cent higher than at the start of the year. It

is still clear that availability is finally

improving in this market. Furthermore,

this is a trend that looks like continuing

for the foreseeable future.

In their regular research on this

market, Metal Bulletin Research (MBR) has

stressed that 2005 is a major turning

point in terms of lead supply, in that it

will be the first year since 2000 that

Western World lead production will have

risen. Indeed, both concentrate and

refined metal production are already

accelerating strongly, with mine output

higher year-on-year by 2.9 per cent in the

Western World over the first five months

of the year, and up 3.0 per cent globally,

while smelter output was up 6.2 per cent

in the West and 7.9 per cent globally.

Moreover, a significant factor that will

support a continuation of this growth

trend – the start-up of Ivernia’s large

Magellan lead mine in Western Australia –

was confirmed in early July 2005, with the

dispatch of its maiden shipment of

concentrate. Production of contained

lead will be around 60,000 tonnes this

year, rising to full capacity of 100,000

tonnes per year (tpy) from 2006.

China is also making a significant

contribution to supply growth again this

year as domestic producers continue to

build new capacity in order to keep pace

with surging demand. Chinese refined

production rose 23.5 per cent year-on-

year in the first half of 2005. This is a

massive jump, but it is no more or less

than what we have come to expect from

the Chinese. And new capacity in the

pipeline will ensure that there is little let-

up in this growth trend.

It is the increasing evidence of this

rising lead supply that has been

underpinning weaker sentiment in the

market and resulting in falling prices.

The demand side, which was reasonably

slack outside China through the early

part of 2005, has provided little

distraction up to now.

However, consumption picked up with

the onset of the high-demand summer

replacement battery season, and in the

key North American market, high

temperatures gave a kick-start to the

2005 season. Auto battery sales typically

pick up in mid/late August, as the

extreme heat contributes to killing

ageing batteries, which must be recycled

and replaced. The earlier than usual

demand surge in 2005 raised hopes that

business would stay stronger for longer,

to provide some protection in the near

term against the expected drift lower in

prices and premiums.

On balance though, it is the supply side

that is still driving this market. Despite

certain setbacks at some producers, supply

is rebounding strongly and will move the

market back from a major deficit last year

to surplus in the second half of 2005 and

2006. This will see stocks rebuilt from

recent critically low levels and prices will

fall as a result. LME cash prices averaged

$887/tonne in 2004 and $983/tonne in H1

2005, peaking in Q2. MBR’s forecast for

$868/tonne in H2 equates to an average of

$925/tonne for the full year 2005, while

the 2006 forecast is lower still, at

$793/tonne.




METALS MARKET FUNDAMENTALS: NICKEL


early February through to late June. LME

stocks fell to 0.3 weeks of Western World

consumption, down from a 12-month

average of 0.6 weeks, and a five-year

average of 0.9 weeks. In comparison, prices

above $15,000/tonne in 2004 were never

sustained for more than a couple of weeks.

The year-to-date peaks came on 6 June

2005, when official three-month prices

reached $16,625/tonne – the highest

since January 2004. Meanwhile, the

Liverpool warehouse. As such, LME

inventories began 2005 at 20,898 tonnes,

almost 75 per cent of which were located

in Liverpool. However, an ending to

Russian de-stocking and only limited

production increases meant these stocks

were consistently drawn down to less

than 10,000 tonnes by mid-March 2005.

During this period, prices rocketed past

$16,000/tonne and a $15,180-

16,625/tonne range was sustained from

ANDREW LEYLAND SEES A FINELY BALANCED NICKEL MARKET LOOKING FORWARD,WITH LOW INVENTORIES AND STOCKPILES SUPPORTING PRICES AT HISTORICALLYHIGH LEVELS, BEFORE A PERIOD OF OVERSUPPLY IS USHERED IN BY THE ARRIVAL OF PROJECTS DUE TO COME ON-STREAM IN LATE 2006 AND 2007

Nickel prices continued to take many by

surprise in the first half of 2005. Following

42.4 per cent and 43.7 per cent increases

in 2003 and 2004 respectively, the LME

nickel price was widely forecast to yield

some ground over the course of the year.

A Reuters survey at the beginning of

2005, for example, showed average

annual cash price forecasts at

$13,000/tonne. In contrast, the H1 cash

price actually averaged $15,830/tonne,

and, as yet, prices have not dipped below

the $14,000/tonne level.

The end of 2004 had been

characterised by a substantial

redistribution of Russian inventory, with

material being directed into the LME’s

High prices look fragile

The end of 2004 had been characterised by a substantial redistribution of Russian inventory

THERINGSIDER



chronic nearby tightness saw the

backwardation flare to $1,400/tonne in

mid-May, with cash prices touching

$17,650/tonne. This was against a

backdrop of LME cancelled warrants

reaching an incredible 53.9 per cent of

total stocks, and staying over the 50 per

cent level for several days at a time when

stocks on the exchange were only about

5,000 tonnes.

That prices could sustain such high

levels was an indication that the factors

that had capped the rises of 2004 had

dissipated. Firstly, although substitution

would continue to be a factor, the large

swings to low nickel content 200 series

stainless steel witnessed in 2004 could

not be repeated in the same magnitude

due to the unsuitability of the material

for many industrial applications.

Secondly, new supply to the market

was capped by both Inco and Norilsk –

the world’s top two producers –

forecasting flat to marginally lower

Stainless steel production, which accounted for 65 per cent of nickel demand in 2004, is still forecast to grow by 5.7 per cent in 2005

annual production, while capacity

increases from other producers were also

relatively small in scale. Thirdly came the

announcement from Norilsk that its

stockpiles of material, from which up to

75,000 tonnes had been released in the

previous two years, had been depleted.

Fourthly, during Q2, reductions in

global economic growth forecasts served

to take away focus from those metals

that had underperformed in 2004 but

were expected to record sizeable deficits

in 2005 – ie, aluminium and zinc – to

those with tight inventory positions,

notably copper and nickel. The above

factors combined to ensure that LME

inventory levels would not be

characterised by an upward trend over

the course of 2005, and that any easing in

the market was more likely to come from

the demand rather than supply side.

During 2005 the global stainless steel

market moved into oversupply, and while

US demand was strong the situation

deteriorated markedly in Europe and

Asia. The high price of nickel and other

alloys served to encourage de-stocking,

while export markets for many producers

were negatively affected by surging

growth in Chinese domestic capacity. This

eventually led to production cuts by

major producers in Q2 and Q3 2005,

placing downward pressure on nickel

and pushing prices down to a $13,905-

15,000/tonne range over July.

It should be noted however that

stainless steel production, which

accounted for 65 per cent of nickel

demand in 2004, is still forecast to grow by

5.7 per cent in 2005. De-stocking and

higher production of 200 and 400 series

grades containing less or no nickel, along

with increased scrap availability, is forecast

to see nickel consumption increase by

only 1.3 per cent in 2005. Indeed,

according to the International Nickel

Study Group (INSG), which reported a

13,600-tonne surplus in H1 2005, global



nickel consumption grew by just 1.0 per

cent year-on-year in the first six months.

While the United States and Spain

have recorded significant increases in

nickel consumption, these are more than

offset by declines elsewhere.

Unsurprisingly, growth has been

dependant upon China, with INSG

reporting 31.4 per cent year-on-year

growth there in H1 2005. The country

recorded net imports of 42,097 tonnes in

the first half on the back of rapidly

expanded stainless steel capacity.

Following de-stocking in H1 2004, this

equated to a 205 per cent year-on-year

increase in net imports.

However, nickel faced a number of

challenges for the remainder of 2005.

Lower than originally forecast stainless

steel production and greater scrap

availability as a substitute to nickel were

expected to keep nickel demand under

pressure over Q3 and Q4. To an extent,

nickel has also been supported by the

feel-good factor in base metal markets

generated by copper donning the mantle

of star performer in 2005. This could

easily subside should copper prices

retreat and declining nickel premiums

signal weaker underlying demand.

Indeed, this is a realistic scenario that

many were forecasting could see nickel

record substantial falls in the latter stages

of the year – especially if Chinese

consumers should enter into another

period of de-stocking.

There is still an upside, with the

possibility for a sustained period above

$15,000/tonne in Q4 on the back of a

reversal in stainless steel production cuts,

a stronger economic picture, seasonally

larger orders over the autumn period, and,

of course, any supply side disruption. On

balance the bias rests with the downside

over the course of the year, as buying

activity from the key stainless sector is

unlikely to return with the force needed to

precipitate a demand-led recovery.

Further forward, Metal Bulletin Research

(MBR) continues to see the market as

finely balanced in 2006, with low

inventories and stockpiles supporting

prices at historically high levels, before a

period of oversupply is ushered in by the

arrival of the much anticipated projects

due to come on-stream later that year and

in 2007. On balance therefore, MBR is

forecasting average LME cash nickel prices

to come in at $15,065/tonne in 2005 and

$13,000/tonne in 2006.

Finally, worthy of mention is the

continued consolidation within the

industry. In corporate activity, BHP Billiton

added a new trophy to its collection,

becoming the world’s number three

nickel producer with the acquisition of

WMC Resources, completed in early

August. The industry now boosts four

100,000-tonnes per year (tpy) plus

producers with the completion of the

Noranda and Falconbridge tie-up at the

end of Q2. China’s Jinchuan Nickel is also

forecast to surpass this level next year. By

2007, both Inco and Norilsk Nickel may

surpass the 250,000 tpy level, supplying

36 per cent of forecast global supply

between them.

Andrew Leyland is a Metals Consultant,


METALS MARKET FUNDAMENTALS: TIN

THERINGSIDER 38

TIN IS A HARDER MARKET THAN MOST TO FORECAST, AND IT IS FINELY BALANCED AT THE MOMENT. HOWEVER, SAYS ANDREW COLE, BARRING ANY SURPRISES, THEPATH OF LEAST RESISTANCE SHOULD STILL BE DOWNWARDS IN COMING MONTHS


Supply looks secure

Tin participated fully in the base metals

bull run that started in the third quarter

of 2003, with official LME cash prices

more than doubling to a peak of

$10,100/tonne in June 2004. However,

unlike most of the other metals, which

continued to rally through the remainder

of 2004 and into 2005, this was the top of

the market for tin.

LME prices spent the remainder of 2004

toying with the $9,000/tonne level, but

never successfully made a convincing and

sustainable move back to $10,000/tonne.

A dramatic upturn in demand, driven in

large part by restocking in the resurgent

electronics sector, had been a key driver of

tin’s impressive performance, but the

supply side played its part too.

Decades of under-investment in

production capacity, plus a shortage of

concentrate due to Indonesia’s raw

material export ban, meant that producers

had been unable to respond when the

market needed more metal. Accordingly,

prices may remain somewhat

unpredictable and volatile, they will still

favour a downside bias. Indeed, based on

all indications available at the time of

writing, there is very little to suggest that

there should be any sustainable reversal

in this falling trend in either 2005, 2006, or

even in 2007. Following an annual

average LME cash price of $8,519/tonne

in 2004, MBR forecasts an average no

better than $7,549/tonne in 2005 and

$6,750/tonne in 2006.

A closer look at the tin market

fundamentals that have been the

driving force behind this price trend

reveals a more difficult-to-read market

than most of the other metals. The

problem largely stems from the fact that

reliable production data is not readily

available, since a very large proportion

of tin output is poorly reported.

Indeed, as much as half of all tin may

now originate from small, informal, and

poorly regulated producers. This is

especially true for concentrate production,

but refined production is also becoming

increasingly hard to track.

At the centre of the problem is the

informal industry in Indonesia. In

response to the Indonesian government’s

ban on exports of ore and concentrate

since mid-2002, a number of crude, small-

scale smelters started up in the country

in 2004 to process the ample stockpiles

of raw materials into exportable metal.

Estimates range up to 30 individual

total reported global stocks of refined tin

fell to a historically critical level of below

four weeks of world consumption in 2004

and 2005, which is down from a recent

high of more than 11 weeks in mid-2002.

While the other metals closed 2004 at

new highs, tin slumped by almost

$2,000/tonne in the space of just a few

weeks to start 2005 at the $7,000-

7,100/tonne level.

The market was dragged upwards again

in the new year in sympathy with the other

metals, which were still performing

strongly, but a brief peak at $8,700/tonne in

March was the best that tin managed in

2005 and hardly amounts to a recovery.

Since the failure of this attempt, tin has

been trending steadily lower. At the time of

writing, cash tin was threatening to drop

below $7,000/tonne for the first time in 18

months, making it the poorest performer

on the LME in 2005 so far.

Overall, Metal Bulletin Research (MBR)

maintains its long-held view that while

A dramatic upturn in demand, driven inlarge part by restocking in the resurgentelectronics sector, had been a key driverof tin’s impressive performance, but the supply side played its part too

THERINGSIDER



smelting units with a combined capacity

of more than 60,000 tonnes per yer (tpy).

The situation is further confused by the

fact that much of this metal will be of

poor quality and may actually be re-

refined in Malaysia and Thailand.

Add to these issues the facts that

Chinese reporting remains questionable,

and that concentrate output has been

under-reported in Africa and Latin

America, and it is clear why the market

lacks confidence in tin’s fundamentals.

Whatever the true figure for tin

production levels, one thing is clear:

output has increased massively in recent

years, and is set to continue rising. MBR’s

best estimates are that global mine

production rose by 14 per cent in 2004,

and refined production leapt by a massive

(but realistic) 24 per cent.

On the demand side, tin is used mainly

in solder, in tinplating, and in various

applications in the chemicals sector. The

latest estimates for refined tin

consumption in Western World

economies show that usage levels are

lagging well behind those of last year,

down almost 10 per cent year-on-year in

the first six months of 2005.

This is no cause for alarm however, and

is hardly surprising given the heavy over-

stocking that characterised the first half

of 2004, and the fact that economic

growth has slowed this year. MBR

therefore expects the second half of 2005

to see an uptick in demand, fuelled by still

buoyant manufacturing sectors in the

USA and Japan, and even EU

manufacturing showing some signs of life

lately. Furthermore, lower tin prices are

likely to attract buyers back to replenish

the stocks they have been running down.

The reverse may be true in China, the

world’s largest consumer of tin. The rate

of apparent consumption growth was

producers, and their success – or lack of it

– will be crucial.

Furthermore, much of the new crude

refinery capacity is high-cost, and

therefore the lower prices go, the more of

this capacity will be taken off line. This

factor alone should protect the downside

for tin prices somewhat in the medium

term. In addition, it is still not clear where

concentrate supplies required by certain

smelter expansions in Latin America will

be sourced from, as the global

concentrate market is still very tight

outside Indonesia, and this factor too

could have a limiting effect on refined

supply growth.





approaching 50 per cent year-on-year in

the first half of 2005, as the country

actually became a net importer of the

metal for the first time. However, allowing

for reasonable growth in real

consumption of 10-20 per cent, MBR

estimates that at least 8,000-10,000

tonnes have been stockpiled this year.

There should therefore be a notable drop

in Chinese demand over the second half

of the year, which may offset the stronger

performance of consumers in the West.

As far as the tin market outlook is

concerned, MBR’s view is that it should

remain well supplied for the foreseeable

future, which will give industry stocks the

opportunity to rebuild gradually from

their recent low levels to a more

comfortable level. This is the most likely

scenario going forward, but it should be

added that the risks to this outlook are on

the upside, for two reasons.

Firstly, demand strength is difficult to

judge with confidence since the market is

undergoing an important structural

change, as the electronics industry

switches to lead-free solder products. The

lead-free directive will become law in July

2006 in the EU, but manufacturers around

the globe are also moving to align

themselves with European standards.

Therefore it is possible that demand

could surprise on the higher side of

current estimates.

The second upside risk for the base case

outlook is the fact that the supply side of

the tin market is beset by uncertainties.

Authorities in both Indonesia and China,

the two largest tin producing nations, are

trying to clamp down on informal

Demand strength is difficult to judge with confidence since the market isundergoing an important structural change

THERINGSIDER 42

ANDREW COLE SAYS THE ZINC MARKET HAS GENUINE UPSIDE POTENTIAL AND COULD REALISTICALLY OUTPERFORM THE REST OF THE BASE METALS COMPLEX FOR THE FORESEEABLE FUTURE


For the majority of 2004, zinc prices

underperformed the rest of the LME base

metals complex, as the underlying supply

deficit in this market was impacted by

the existence of large stockpiles of metal

which were delivered onto warrant.

Indeed, by the start of the fourth quarter

of 2004, zinc prices were barely higher

than the level in January of that year.

However, from September 2004 to

March 2005, LME zinc stocks finally

started to fall consistently, a host of

unexpected supply disruptions

emerged, and China’s massive surge in

dip in demand, the start of an extended

phase of US dollar strength, overbought

technical considerations, and heavy

selling on weaker sentiment across the

rest of the LME complex combined to

engineer a correction back down to the

$1,200/tonne level.

The real killer blow came with the

arrival of another massive tonnage of

metal onto LME warrant. Some 106,000

tonnes were registered in the space of just

three days in early-mid June 2005.

To the time of writing in early October,

LME zinc prices had recovered back to the

demand proved that the metal had

staying power. Confidence in zinc

returned as the market realised that it

had become undervalued, and prices

duly rallied strongly.

Indeed, over this period zinc

outperformed the rest of the complex as

it made up lost ground. Official LME cash

prices peaked in mid-March 2005 at

$1,430/tonne and three-month prices hit

$1,447/tonne – seven-and-a-half year

highs. It all looked to be going well for

zinc at this point, but a build-up of

concerns over the economic outlook, a

A potential outperformer

METALS MARKET FUNDAMENTALS: ZINC

THERINGSIDER



$1,400-1,450/tonne level, re-challenging

the highs of earlier in the year, as stocks

had once more embarked on a consistent

downward course. However, total reported

industry stocks remain at a comfortable

level of around seven weeks of

consumption, hardly indicative of a tight

market. Thus there typically has been little

panic among consumers and traders to

secure metal, as there has in some of the

much tighter markets, such as copper.

Indeed, the LME cash to three-month

spread has been in contango through

virtually the entire base metals bull run,

emphasising that this market has never

yet threatened to get especially tight.

That is, not until Hurricane Katrina

slammed into New Orleans and flooded

the city that is home to 248,575 tonnes of

LME-warranted zinc stocks. Indeed, on 6

September, the LME announced that it

had temporarily suspended as good

delivery all warrants stored in New

Orleans, due to the shortage of reliable

information and unacceptable levels of

uncertainty about insurance, conditions

and access in the city and the extent that

metal on warrant had been damaged by

flooding. The LME also announced

temporary limits on the zinc

backwardation. These unprecedented

measures were still in place at the time of

writing and effectively meant that some

44.4 per cent of LME stocks and around 25

per cent of all ‘reported’ zinc stocks

globally had been inaccessible to the

market for about a month. Metal Bulletin

Research (MBR) does not expect that there

will be any tangible long-term

implications for supply, as the metal is

likely to be largely undamaged, while in

the near term the market is still

sufficiently well supplied to continue

functioning ‘normally’.

Looking forward, MBR maintains a bullish

outlook for zinc and furthermore expects

that this market could well be the star

performer of the LME base metals complex

as we go forward into 2006.There are a

number of good reasons to be bullish.

The first and inescapably significant bull

factor is an acute shortage of concentrate in

the global market, which is holding back

refined zinc production growth. According

to the latest official data from the

International Lead and Zinc Study Group

(ILZSG), mine output rose only 1.9 per cent

year-on-year in the first half of 2005 – well

below expectations.There is evidence that

‘high-grading’ by some miners through the

recent hard times (2001/2002) has now left

mines processing lower grade ore, which is

resulting in lower output of contained

metal in their concentrate product.This may

be an issue that is now frustrating many

miners, and the impact on the already tight

concentrate market could be severe.

In addition, like in the copper market,

zinc producers have also been hit by a

string of accidents, strikes and other

unscheduled interruptions to production,

affecting some of the major operations in

Europe, Latin America, North America,

Australia and Asia.

Secondly, there is the ‘China factor’. A

surge in new galvanised steel production

capacity (domestic output rose 40 per

cent year-on-year in the first half of 2005)

due to booming demand from the

country’s fast-expanding auto sector,

home appliance sector and in

construction and infrastructure

investment, have seen China’s hunger for

zinc expand phenomenally this year. At

the same time however, China’s smelters

are not only faced with the same global

shortage of concentrate that other

smelters are enduring, but power is in

short supply too. This double whammy

means that domestic zinc production is

being constrained on two fronts and

China is becoming an increasingly

significant net importer of refined zinc as

a result.

Confidence in zinc returned as the market realised ithad become undervalued, and prices rallied strongly

Thirdly, zinc demand in the major

Western World economies is also worth a

mention. Admittedly, demand has been

poor in the year to date, in fact worse than

previously anticipated. However, production

cutbacks by numerous galvanised steel

mills on both sides of the Atlantic have

been extended from the second quarter of

2005 into the third quarter in order to bring

coated steel inventories down from their

previously elevated levels.While this has

clearly dented demand for zinc from its

main consuming sector, it is certainly

encouraging to see the galvanised steel

oversupply problem addressed so rapidly

and convincingly, and this bodes well for a

return to positive zinc demand growth

once the inventory corrections have run

their course. Given the rebound in

economic indicators recently too, the

outlook for zinc consumption in Q4 is

looking positive.

With these factors shaping the

fundamental picture of the zinc market

going forward, one can only be bullish

towards this metal. Indeed, zinc typically

peaks later in the economic cycle anyway,

and, providing there are no more shocks

to the system, this cycle appears to be no

exception. With demand on the up and

supply constrained until 2007 – the

earliest that any major new mine capacity

is scheduled to arrive on stream –

inventories will continue to be eroded

over the remainder of 2005 and

throughout 2006 as well.

Zinc prices thus have genuine upside

potential and this market could

realistically outperform the rest of the

base metals complex for the foreseeable

future. On this basis, Metal Bulletin

Research (MBR) predicts a steadily rising

trend for LME prices, and following an

annual cash average of $1,048/tonne in

2004, is forecasting $1,306/tonne for 2005

and $1,396/tonne in 2006.

The real test will be when copper – so

long the trendsetter for the LME complex

– finally turns lower. We believe that

copper’s anticipated downturn will weigh

zinc down to some extent, and so too will

the high oil price and resulting burden on

economic growth prospects. If it were not

for these factors, the outlook for zinc

prices might be even more bullish.




Given the rebound in economicindicators recently, the outlook for zincconsumption in Q4 is looking positive



FOLLOWING A PRICE FREEFALL IN MID-2005, THE OUTLOOK FOR ALUMINIUM ISGENERALLY GOOD, SAYS JAMES SALTER, BUT A SURGE LIKE THOSE IN THE COPPERAND NICKEL MARKETS IS UNLIKELY, GIVEN GREATER THAN FORECAST SUPPLY

2003 and 6.8¢/lb in 2004, while European

and Asian premiums also came under

heavy upward pressure, partly due to

metal being attracted away from these

regions to the chronically tight North

American market.

Several factors helped sustain the

upward price momentum between

September 2004 and mid-March 2005.

Firstly, the US dollar continued to weaken,

and thus boosted demand by making it

relatively cheaper for consumers located

in non-dollar denominated countries to

purchase metal. Secondly, aluminium

benefited from strength elsewhere in the

Primary Aluminium

The bull run that began in October 2003

was sustained in 2004, with the

benchmark LME three-month contract

recording a series of successively rising

peaks to reach $2,015/tonne on 10 March

2005 – a new ten-and-a-half year high. The

market was appearing extremely tight by

mid-March. Nearby spreads were in

backwardation – the cash-to-three month

‘back’ touched $42/tonne on 14 March,

while regional market premiums were also

at high levels. The US Midwest premium,

for example, reached 7.6-7.8¢/lb,

compared with an average of 3.9¢/lb in

Market sentiment improves

METALS MARKET FUNDAMENTALS: PRIMARY ALUMINIUM AND ALUMINIUM ALLOYS

THERINGSIDER 49

A strong end to the year resulted in world primaryaluminium demand rising by an impressive 9.4 per cent


LME complex, with surging copper and

nickel prices helping boost the metal ‘in

sympathy’. Similarly, rising oil prices were a

benefit to aluminium, as speculators

invested in commodity baskets.

Thirdly, world economic growth

remained buoyant, particularly in North

America and China. While underlying

consumption of end-use aluminium

products was strong, re-stocking through

the supply chain provided an additional

boost to primary aluminium consumption.

A strong end to the year resulted in world

primary aluminium demand rising by an

impressive 9.4 per cent in 2004 – the

highest rate for 20 years.

Fourthly, aluminium supply was

constrained by the closure of smelting

capacity, with striking workers causing the

closure of two of the three potlines at the

409,000 tonnes per year (tpy) Bécancour

smelter in Canada from July 2004

(although a new labour agreement was

signed in November 2004, it took until

April 2005 for the plant to return to full

capacity) and Ormet fully idling its

260,000 tpy Hannibal smelter in the US.

Fifthly, there was hope that Chinese

primary aluminium production growth

would begin to moderate, implying that

exports of metal from the country would

begin to fall. Domestic production had

continued to surge during the first half of

2004, but several factors pointed towards

slower growth. High spot alumina prices

(these have generally been in excess of

$400/tonne fob since October 2004),

power shortages and rising electricity

prices, the government-enforced closure

of inefficient and polluting Søderberg

smelting capacity, the cancellation of an 8

per cent VAT rebate on aluminium exports,

the imposition of a 5 per cent export tax

on unwrought aluminium and other



government policies, all pointed towards

restraining Chinese production/exports.

Finally, the imbalance of demand over

supply was reflected in the continued

decline in LME stocks, which after hitting

1.45 million tonnes in January 2004 had

fallen to around 550,000 tonnes by late

March 2005. Overall, Metal Bulletin

Research (MBR) estimates that the world

aluminium market recorded a deficit of

455,000 tonnes in 2004.

Aluminium prices subsequently came

under sharp downward pressure in mid-

April in a commodity-wide correction, but

while some other metals in the LME

complex recovered these losses, aluminium

failed to do likewise.The three-month

contract went into freefall, touching a low

of $1,688/tonne of 1 July 2005, although

good support around the $1,700/tonne

level prevented further losses.

Why did aluminium prices under-

perform during this period, falling from an

average of $1,963/tonne in March 2005 to

$1,796/tonne in July 2005? The main

reason is that the aluminium market

fundamentals have undoubtedly been

weaker in 2005 than earlier predicted. A

period of soft world economic growth in

the second quarter of the year, coupled

with de-stocking of metal through the

supply chain, hit aluminium demand hard.

Meanwhile, the earlier-than-expected

commissioning of the large-scale Alba

(Bahrain) and Alouette (Canada) smelter

expansions has contributed to strong

growth in world aluminium production.

That other driver of growth, China, has

also not disappointed. Despite the closure

of around 1 million tpy of Søderberg

smelting capacity over the past eighteen

months, together with the other

previously mentioned factors impacting

upon domestic smelters (high alumina

and power prices, etc), China’s production

rose by 17.8 per cent year-on-year in the

January-June period of 2005. Meanwhile,

Chinese net exports of primary aluminium

totalled 470,000 tonnes in the first half of

2005 compared with just 87,000 tonnes in

the corresponding period of 2004 – hardly

the sharp reduction in exports which

much of the positive market sentiment in

late 2004 was built upon.

These factors have resulted in a market

better supplied with aluminium than

forecast several months ago. The cash-to-

three-month contango has largely been in

the $15-25/tonne range since mid-

June, while regional premiums have fallen

sharply in recent months – hardly

indicative of a market short of metal.

Despite this, LME prices firmed in late July

and early August, rising back to around

$1,900/tonne, before easing to

$1,850/tonne at the time of writing. It is

clear that market sentiment has now

improved after a sustained period of

lacklustre trading. Recently released

economic and sector-specific data

suggests that we may be entering a

period of stronger demand growth, while

LME aluminium stocks continue to set

new cyclical lows.

Meanwhile, the market is also receiving

support from the expected power-related

closure of smelting capacity in Europe

from later this year. Indeed, beginning in

mid-June 2005, there were a series of

announcements suggesting that more

than 1 million tpy of European smelting

capacity is under threat of closure due to

high power prices. Hydro has already

confirmed that its Hamburg and Stade

smelters (both in Germany) will close

within the next year. Smelters in other

European locations, principally France and

Switzerland, are also believed to be under

serious threat of closure.

Finally, the Chinese authorities, after an

extended delay, have finally announced an

end to toll trading, whereby alumina is

imported free of import duty (8 per cent)

and VAT (17 per cent) provided the

primary aluminium produced is then

exported. The new legislation came into

force on 22 August 2005, although

smelters that have already received

permits to import alumina tax-free would

be allowed to continue to do so until the

end of the year. By ending the tax break,

the Chinese authorities ultimately hope to

reduce primary aluminium production,

with the twin benefits of lowering

electricity consumption by the sector and

forcing less competitive smelters to close.

Overall, MBR expects the world primary

aluminium market to record a deficit of

77,000 tonnes in 2005 and a similar sized

supply shortage in 2006. At this early

stage, the market is expected to remain in

deficit in 2007 too, possibly by around

200,000 tonnes.

The simple fact is that there is

insufficient new smelting capacity due to

be commissioned between now and 2007

LME aluminiumstocks continue to set new cyclical lows


THERINGSIDER 52

for supply to catch up with demand, while

the threat of power-related closures in

Europe (and also in North America) is an

additional problem. It should be noted

that these deficit years follow a

cumulative market surplus of 1.19 million

tonnes between 2001 and 2003, so it is

unlikely that the market will reach critical

stock levels before 2007 at the earliest.

Thus, over the next 12 months, while

prices will remain relatively high, averaging

around $1,800/tonne in 2006, it is unlikely

that we will witness a surge in aluminium

prices as seen in the copper and nickel

markets over the past two years. A large

threat to aluminium’s aspirations is likely to

be the copper contract.This metal remains

the trendsetter in the LME complex, and an

expected fall in copper prices in 2006 could

also dampen aluminium’s prospects.

However, given the positive fundamental

market environment, there is general

optimism over aluminium’s prospects for

the next 12 months.

Aluminium Alloys

Overall trends in the LME’s two other

aluminium-based contracts – aluminium

alloy and NASAAC – are taken from primary

aluminium, although both of these smaller

contracts have their own individual

supply/demand fundamentals that cause

prices to deviate away from this trend.

Aluminium alloy prices averaged 92.3 per

cent of the primary contract (on an official

three-month basis) in 2004, but during the

first half of 2005 this had fallen to 89.9 per

cent, reflecting moderating demand from

European car producers (the main users of

the aluminium alloy contract) and rising

LME stocks.

A similar story can be told for NASAAC.

Three-month NASAAC prices were 2.8 per

cent lower than primary aluminium

prices in 2004, but since the beginning of

2005 this differential has risen to around

10 per cent. This trend is expected to

continue in the medium term on the

assumption that overall US automotive

production remains weak. While US

commercial vehicle output has continued

thus far to expand at fairly solid rates, the

passenger car sector remains beset with

problems. While the Big Three car

producers, GM, Ford and Chrysler, have

attempted to maintain market share

through incentive schemes, there will

come a time when this is no longer

possible. The trend of falling domestic car

production is thus expected to continue

over the next year, which will apply

downward pressure to NASAAC prices.

However, any weakness in the individual

aluminium alloy and NASAAC markets

over the coming year will be at odds with

the relative strength of the primary

aluminium market, suggesting that prices

for these contracts will receive

sympathetic support.

James Salter is Principal Metals Analyst,


Aluminium alloy prices averaged 92.3 per cent of the primary contract


REGIONAL DEVELOPMENTS: AFRICA

THERINGSIDER 54

THE RECENT END OF MANY OF AFRICA’S SEEMINGLY INTRACTABLE CONFLICTS, ANDTHE DECISION BY THE G8 COUNTRIES TO WIPE OUT A SIGNIFICANT PROPORTION OFTHE CONTINENT’S DEBT, HAVE COMBINED TO PROVIDE MANY COUNTRIES IN THEREGION WITH THE BEST OPPORTUNITY IN DECADES TO DEVELOP THEIR BASE METALRESOURCES, REPORTS NNAMDI ANYADIKE


Democratisationboosting production

THERINGSIDER



While Africa’s overall mining potential is

vast – the continent is the source of more

than 60 metal and mineral products – its

production of copper, lead and zinc

currently contributes less than 7 per cent

of world supply. Nonetheless, there has

been an upsurge in exploration and mine

development throughout Africa, with

countries coming together under the

African Mining Partnership launched in

2003 to better position themselves to

benefit more from their natural resources.

Much of the last three decades of the

20th century, following the gaining of

political independence in most countries

in the 1960s, witnessed a decline in Africa’s

base metal mining sector as

mismanagement and regional conflict

discouraged investors from moving into

the sector. The Democratic Republic of

Congo (DRC, formerly Zaire) is a case in

point, where the once thriving copper

industry has now largely been laid waste.

“It is interesting to note that Africa

produced 400,000 tonnes of aluminium

and one million tonnes of refined copper

in 1984 and that twenty years later copper

production had fallen to 500,000 tonnes,”

says Angus MacMillan, minerals strategist

at Prudential-Bache.

But since the start of the new century

there has been a turnaround in the

industry’s fortunes, not least in copper

mining, and western investors are

climbing aboard.

the Global Alumina project, set up to use

Guinea’s vast bauxite resources to

produce alumina for sale to the global

aluminium industry.

Most of Africa’s copper production

comes from Zambia, DRC and South Africa.

Despite sharp downturns in production in

Zambia and DRC, due to a lack of

investment and in DRC civil war over the

past two decades, the outlook, particularly

in Zambia, has improved markedly.

The withdrawal of South Africa’s Anglo

American from the Zambian copper belt in

2002 was initially a blow. Copper provides

the country with 85 per cent of its foreign

exchange and over 20 per cent of its GDP.

However, in 2004 India’s Vedanta Resources

acquired a 51 per cent stake in Zambia’s

largest mine, Konkola Copper Mines (KCM)

and in July 2005 it announced a $500-700

million plan to double KCM’s copper

smelting capacity to 400,000 tonnes per

annum. Plans are also in place to extract

high-grade copper from the mines.

The increase in African copper

production, from the Zambian copper belt

and elsewhere, has been triggered by the

rise in base metal prices and renewed

investment in production facilities.

In 2003, African copper mine

production was 556,000 tonnes, rising to

635,000 tonnes in 2004, with a forecast

rise to 806,000 tonnes in 2005 and

886,000 tonnes in 2006. Refined copper

production has similarly risen, from

The aluminium sector has seen

impressive growth, with smelter and

refinery expansions in South Africa,

Mozambique and Ghana either in place or

underway. African primary aluminium

production, again predominantly in South

Africa, Mozambique and Ghana, is

currently around 1.5 million tonnes per

year. Smelter capacity expansions in these

three countries are also either underway

or are being planned.

Africa’s total aluminium production has

grown from 400,000 tonnes in 1984 to

over 1.7 million tonnes in 2004.

“African aluminium production will be

around 250,000 tonnes higher in 2007,

largely reflecting the ongoing expansion

of Egyptalum and the partial restart of

Tema in Ghana,” forecasts MacMillan.

“Further ahead there is the possibility that

Alcan will go ahead with the greenfield

660,000-tonnes-per-year Coega project in

South Africa, which could come on-stream

in 2008. BHP Billiton is keen to expand

Mozal on Mozambique, but power

availability is a problem.”

In Guinea, the world’s foremost bauxite

producer, containing 30 per cent of the

world’s reserves and accounting for 94

per cent of African bauxite production,

construction of a 2.8 million tonne per

annum alumina refinery in Boke is

expected to soon get underway, with

completion planned by 2009. This follows

the government’s approval in mid-2005 of

Regions Mine Production (‘000t) Refined Production (‘000t) Copper Usage (‘000t)

2003 2004 2005 2006 2003 2004 2005 2006 2003 2004 2005 2006

Africa 556 635 806 886 454 497 611 685 159 177 183 185

N America 2,045 2,131 2,305 2,406 2,071 2,182 2,310 2,350 2,903 3,095 3,208 3,323

Latin America 5,975 6,726 6,944 6,850 3,619 3,634 3,894 3,964 494 538 571 599

Asean-10 1,053 894 1,254 1,167 422 438 614 694 591 669 710 753

Asia ex-Asean/CIS 930 994 1,079 1,175 4,372 4,580 5,132 5,791 6,444 6,772 7,329 7,775

Asia-CIS 595 572 580 580 511 530 557 570 99 93 100 110

EU-25 673 728 721 723 2,297 2,309 2,405 2,421 3,962 4,052 4,123 4,227

Europe Others 825 815 850 895 1,003 1,115 1,151 1,219 784 931 969 1,009

Oceania 1,026 1,027 1,140 1,159 484 490 500 512 183 168 176 185

Total 13,678 14,522 15,678 15,840 15,234 15,776 17,175 18,206 15,620 16,496 17,370 18,167

World 13,678 14,522 15,678 15,840 15,234 15,776 17,110 18,074 15,620 16,496 17,370 18,167

% change 6.2% 8.0% 1.0% 3.6% 8.5% 5.6% 5.6% 5.3% 4.6%

Refined Production – Usage Balance -386 -719 -259 -93

Source: ICSG

Forecast to 2006



454,000 tonnes in 2003 to 497,000 tonnes

in 2004, and is forecast to rise to 611,000

tonnes in 2005 and 685,000 tones in 2006.

Prudential-Bache’s MacMillan expects

refined copper production in Africa to

exceed 800,000 tonnes in 2007, with

Zambia accounting for over 80 per cent of

this, due to the expansion of the Zambian

copper industry.

Copper production is also taking off in

Botswana, where African Copper Ltd plans

to start producing 15,000 tons of copper a

year at a new open pit mine in late 2006.

Construction costing $35-40 million is due

to start later this year on the Dukwe open

pit mine in northeastern Botswana.

“We are trying to target production

starting next year: the fourth quarter is

our aim right now,” says African Copper’s

CEO David Jones. Later, annual output

could be boosted to 50,000 tons at the

Dukwe site if an underground mine is

built, adds Jones. The total project is

estimated to contain a deposit of 1.3

billion lbs of copper and have an initial

mine life of about 18 years, but additions

to the resource are expected. The mine’s

break-even cost is 75-80 cents a pound.

Africa produces some 80,000 tonnes

per year of nickel and cobalt, with South

Africa contributing 50 per cent and

Zimbabwe and Botswana the remainder.

The 70 tonnes of refined nickel that Africa

produces represents only around 5 per

cent of global supply. However, the

advent of the Pressure Acid Leaching

(PAL) process has resulted in several

previously unexploitable ore deposits

becoming viable. Africa has several viable

lateritic nickel projects in Madagascar,

Burundi and Côte d’Ivoire.

Anglo American and Avmin have a joint

venture in the only primary nickel

producer in South Africa, the Nkomati

mine. Anglo American is a major

shareholder in Bindura Nickel, Zimbabwe.

Falconbridge, a global nickel miner and

explorer, is currently assessing deposits in

Madagascar and Côte d’Ivoire.

Africa is a small player in the production

of zinc and lead, producing approximately

6 per cent and 4 per cent of global

production respectively. However,

significant expansions are underway.

The Rosh Pinah lead/zinc mine in

southern Namibia is undergoing a

dramatic transformation as it gears up to

deliver for the future. In July 2005, Anglo

American’s wholly-owned $454-million

Skorpion zinc mine and refinery at Rosh

Pinah in southern Namibia produced its

first metal, with full capacity of 150,000

tonnes per year of refined zinc expected in

2005. Production is of low cost zinc oxides

using the less conventional leach and

electro-winning technology. Skorpion is

expected to be one of the world’s lowest-

cost zinc producers, with costs in the low

20 cents per lb, compared with an industry

average of around 35 cents.

The ‘peace dividend’ resulting from the

spread of democracy throughout much of

the African sub-Saharan region since 2000

now seems firmly entrenched and the

African base metals mining sector is

benefiting accordingly. With no sign of a

slowdown in demand from the developed

world – much less China and the other

Asian economies – the supply outlook for

the foreseeable future is positive. As for

African consumption of all the base

metals, only marginal growth is expected

over the next few years.

REGIONAL DEVELOPMENTS: SOUTH AMERICA

THERINGSIDER 58

DIANA KINCH REPORTS A FLURRY OF NEW PROJECTS IN THE SOUTH AMERICAN METALS PRODUCING ARENA, PROMISING CONSIDERABLE PRODUCTION BOOSTS IN COPPER, ALUMINIUM, NICKEL AND TIN


The international metals market boom of

2004 and early 2005 led to the launch of a

significant number of new metals

producing projects in South America,

reflecting the region’s still largely

untapped minerals resources in copper,

aluminium, nickel and tin. Most of these

new projects will be primarily export-

based, as local consumption levels still fall

a long way short of the region’s supposed

eventual full potential, despite

encouraging growth signs in 2004.

Bold new plans for copper dominated

the South American mining and metals

scene in early 2005, amid prospects of a

continuing tightness for concentrates, and

of firm market prices for the medium term.

The biggest trumps were laid down by

Chile’s Codelco, Canada’s Noranda and

Brazil’s CVRD.

Codelco announced investments of $1.9

billion in 2005, 27 per cent up on 2004, to

boost output by several hundred thousand

tonnes over the next few years from 2004’s

1.75 million tonnes of copper metal. This

included plans to acquire the 320,000

tonnes per year (tpy) Ventanas smelter for

$393 million from state minerals company

Enami, and expand Ventanas’ output to

365,000 tpy. Enami will in turn spend $53

million on expanding its Paipote smelter

from 300,000 tpy to 375,000 tpy, and

expand supporting mine operations.

Noranda is mulling plans to invest no

less than $2.4 billion in developing its

Chilean and Argentine copper interests,

including an expansion of its major

Altonorte smelter from its current 820,000

tpy and an upping of its Fortuna del Cobre

mine from 60,000 tpy to 90,000 tpy, a third

expansion of the Anglo-American and

Falconbridge joint venture Collahuasi mine

expected on-stream by 2007. In December

2004 CVRD announced the setting up of a

test hydrometallurgical plant to produce

cathodes from its Sossego, Salobo and

Alemão mine sites, with a view to eventual

commercial use of this technology, which

would considerably boost the company’s

copper metal production capability.

CVRD’s efforts will also boost Brazil’s

position as a copper metals exporter, at the

same time encouraging higher production

at Caraiba Metais, currently the country’s

sole copper smelter, which will thus be

able to reduce its dependence on

imported concentrates.

Caraiba (where during 2005 de-

bottlenecking has raised metals production

capacity to 250,000 tpy, of which 40 per

cent is exported) should raise capacity to

around 310,000 tpy by 2008 by further de-

bottlenecking and has also announced

studies on eventually doubling its capacity

via the installation of additional smelting

facilities at its Bahia site.

Taking advantage of what appear to be

favourable production and domestic

market conditions for copper, Codelco has

set up an office in Rio de Janeiro and is

prospecting in Bahia state, near the

Caraiba smelter.

Canada’s Yamana Gold is another

newcomer on the Brazilian copper

production scene, with construction

underway on its Chapada gold and

copper mine in Goias state, set to

produce an average of 170,000 tpy

copper concentrates with an average 28

per cent copper content for 20 years,

starting late 2006.

Venezuela continues to make big noises

about the new potlines planned for the

CVG-controlled aluminium smelters

and development of Argentina’s huge El

Pachon deposit with potential of 200,000

tpy. BHP Billiton’s Escondida mine in Chile

is also slated for further expansion.

Chile’s overall copper output should

thus grow 3.5 per cent over 2004 to a

record 5.55 million tonnes of metal in

2005, according to state copper

commission Cochilco. Cochilco has warned

that the value of the country’s copper

exports could nonetheless fall in 2005 to

$12.4 billion, 10.7 per cent down on 2004’s

$14.2 billion, due to expectations of lower

average prices. This follows a nine-year

average high in 2004.

Cochilco foresees the global copper

deficit falling to 170,000 tonnes in 2005

from 2004’s 418,000 tonnes, partly due

to lower import demand from China,

Chile’s main copper export market. The

underlying market demand for more

concentrates is nonetheless a driving

force behind projects to bring more

South American copper mining capacity

on-stream, particularly in Chile, Brazil

and Peru.

While Chile’s Codelco remains king,

CVRD’s eruption onto the copper mining

scene in mid-2004, with the start-up of its

140,000 tpy copper contained Sossego

mine, has brought Brazil firmly into the

arena of concentrates exporters at a time

of market tightness and firm prices.

CVRD is proceeding with plans to

produce a total of 650,000 tpy copper

contained – both in the form of

concentrates and cathode – by 2011 at five

mine sites in the Carajas region in an

estimated investment of $2.6 billion.

CVRD’s second copper project to produce

36,000 tpy copper cathode via SXEW, is

due for imminent board approval and

Bold investmentresponse to firm price

THERINGSIDER



Venalum and Alcasa, with preparatory

work on the first having started in mid-

2005 following state-owned CVG’s decision

to go ahead with the $1.05 billion Venalum

no. 6 line using its own financial resources.

This will raise Venalum’s capacity by

285,000 tpy to 715,000 tpy by 2008, with

the new capacity in theory designed for

new domestic downstream processors,

which are being encouraged by the

government, meaning that total output

should be aimed at least 50 per cent for the

domestic market.The no. 6 Venalum line

will bring Venezuela’s primary aluminium

production capacity to a considerable

930,000 tpy, with the country’s ample

bauxite reserves and electrical energy

availability likely to facilitate further

expansions, financing permitting.

from 140,000 to 580,000 tpy by late 2007,

in order to meet additional demand from

both Alcasa and Venalum.

Also in Venezuela, Russia’s RUSAL is

cautiously eyeing a possible involvement

in setting up a new alumina plant,

indicating growing interest in Venezuela

from international investors.

In Brazil Cia Brasileira do Aluminio (CBA)

brought on-stream a primary aluminium

capacity expansion to 400,000 tpy in mid-

2005, has a confirmed expansion to

470,000 tpy scheduled for late 2007, and

announced a further plan to expand

capacity to 600,000 tpy by around 2011,

with output again aimed at least 50 per

cent for the domestic market.

CBA’s progressive expansions are only

possible due to its parent Votorantim

Venalum, 20 per cent owned by

Japanese companies, has recently been

beating productivity records, and is

expected in the near future to move ahead

with plans for a no. 7 potline, also of

285,000 tpy capacity, to come on stream

2010, following CVG’s approval of this

project as long ago as 2002.

Alcasa announced that, like Venalum, it

will use local technology for its no. 5

potline. This should have a capacity of

255,000 tpy, boosting this Puerto Ordaz

smelter`s total primary aluminium

capacity to 465,000 tpy as from an

unspecified date (the project is still

subject to a final definition of financing

arrangements). Sister carbon anodes plant

Carbonorca began work in 2005 on a

project to expand anodes production

Russia’s RUSAL is cautiouslyeyeing a possible involvementin setting up a new aluminaplant in Venezuela



group’s heavy investments in electrical

energy generation, which means it will

maintain 60 per cent self-sufficiency in

energy generation throughout the entire

expansion process. Energy availability and

cost have recently been a hindrance to

Brazil’s expansion of its current 1.5 million

tpy primary aluminium production, of

which around 50 per cent is exported.

The only other Brazilian smelter

currently to be expanding its primary

aluminium capacity is Alumar, a joint

venture between BHP-Billiton and Alcoa.

Alcoa is enlarging its capacity at Alumar by

67,000 tpy and BHP Billiton should add

16,000 tpy there via technical

improvements by 2009, giving Alumar an

eventual total capacity of 459,000 tpy.

In Argentina, the building of a new

electricity transmission line has allowed

Aluar to firm up its plans for an expansion

of its Puerto Madryn smelter from 267,000

tpy to 400,000 tpy within the next two to

three years, with the extra aluminium to be

aimed at the export market. Aluar has

recently been exporting around 80 per

cent of its output.

In mid-2005 CVRD announced the go-

ahead for its $1.2 billion 46,000 tpy

Vermelho HPAL electrolytic nickel project in

Carajas, aimed primarily for export after its

start-up in 2008. CVRD also plans to become

one of the world’s top five nickel miners

within the next few years, as it is

prospecting nickel at no fewer than four

other sites, which could, if all goes according

to plan, give it a total nickel contained

output of some 100,000 tpy by 2010.

An imminent go-ahead is also expected

for Canico Resource Corp of Canada’s

Mineracão Onca Puma ferronickel project,

also in Carajas, which would have an initial

capacity of 35,000 tpy of nickel contained,

also from 2008, with the potential to

double to 70,000 tpy after two years, again

mainly for export. This follows Votorantim

group’s completion of a metal production

expansion to 23,000 tpy at Cia Niquel de

Tocantins (CNT) and its plans to extend the

life of its 7,000 tpy Fortaleza de Minas

matte operation.

The two new giant Carajas projects, with

expected useful mine lives of 40 years at

Vermelho and 60 years at Onca Puma, will

revolutionise Brazil’s nickel industry, more

than quadrupling the country’s current

nickel contained output of around 36,000

tpy to a potential 152,000 tpy from around

2010. They will also push the country up

into the major league of the world’s top

five nickel producers, along with Russia,

Japan, Canada and Australia.

This development will further

consolidate Brazil’s position as a net nickel

exporter, reinforcing a trend already

established by Votorantim, which has

recently been exporting around half of

CNT’s output and which is continuing to

export to Finland’s OMG the entire output

of Fortaleza de Minas, under an agreement

inherited from the nickel matte project’s

former owner, Rio Tinto.

Despite the recent capacity doubling of

Brazil’s Acesita to nearly one million tpy of

stainless steel and capacity enlargements

at special steelmakers Acos Finos Piratini,

Acos Villares and Villares Metals, Brazil’s

domestic nickel market continues to be

relatively limited. This is, however, largely

compensated for by the rosy international

nickel demand prospects, with analyst

Brook Hunt forecasting demand growth

of 3.4 per cent a year up until 2015, led on

largely by new capacity in China’s

stainless steel industry.

Tin output and shipments were

brought to a standstill during June 2005

by Bolivia’s political and social turmoil,

culminating in the resignation of

President Carlos Mesa. Production at

mining company Huanuni and the 24,000

tpy Vinto smelter was either brought to a

halt or disrupted for several weeks

following trade union grouping Central

Obrero Boliviano’s calling out of all

workers on an indefinite stoppage in

support of the nationalisation of the oil,

gas and mining sectors, according to

state-owned mining company Comibol.

There is significant foreign investment in

the Bolivian mining sector, with companies

involved including RBG at the Huanuni tin

mine, Canada’s Orvana Minerals at the Don

Mario gold mine and Glencore at Comsur,

which owns several mining and

metallurgical operations.

Brazil again hit the headlines in tin, not

least with steelmaker CSN making its

debut onto the tin mining and smelting

scene in April 2005 with its purchase of

Brazil’s second biggest tinmaker, Estanhos

de Rondonia SA (Ersa) from Cesbra.

Cesbra thus pulls out of mining and

smelting and will concentrate on

expanding its tin solders and chemicals

plant. CSN, which produces more than 1

million tpy of tinplate and will therefore

be able to achieve an integrated tinplate

operation, announced plans to expand

Ersa’s mine from 1,500 to 3,600 tpy tin

contained and its smelter to 4,800 tpy tin

metal by 2009.

Paranapanema, whose Mamore

subsidiary is Brazil’s largest tin producer,

continues with development of its $14

million Rocha Sa hardrock cassiterite

mining project, which will boost the

company’s output from its Pitinga mine

and São Paulo smelter to an estimated

10,500 tpy of tin metal in 2006 and

12,000 tpy in 2007, up from 7,500 tonnes

in 2004, and with output directed mainly

for export. Its expansion plans should be

aided by debt-for-equity swap

negotiations underway with Brazil’s

BNDES development bank, which could

take 17 per cent of Paranapanema’s

voting capital.

Indications were that Brazil, currently

the world’s fourth biggest tin producing

country, could soon regain a place of

greater prominence on world tin

markets, with production, imports and

domestic consumption all set to grow.

Following several years of decline,

Brazil’s cassiterite output rose a modest

3.2 per cent in 2004 to 12,467 tonnes.

Tin metal exports leapt 49.6 per cent to

5,830 tonnes, while domestic consumption

also grew to around 3,200 tonnes, partly

on the basis of increased tin metal

imports, according to data from the

Brazilian tin producers’ association

Sindicato Nacional de Industrias

Extrativistas da Estanho (SNIEE).

The two new giant Carajasprojects will push Brazil into theworld’s top five nickel producers

THERINGSIDER

REGIONAL DEVELOPMENTS: ASIA


THE GLOBAL ECONOMY IS NOW BEING DRIVEN AS MUCH BY SPECTACULAR ASIAN – PARTICULARLY CHINESE – GROWTH AS IT IS BY THE US ECONOMY. AS A RESULT THE WORLD IS WITNESSING AN UNRIVALLED, STRONG BROAD-BASED DEMAND FOR BASE METALS. DAVID FRENSHAM REPORTS

Although the Chinese government is

taking steps to cool its economy and

reduce investment in aluminium and

luxury housing, investment is still required

for infrastructure, power generation and

distribution, low-cost housing and food

distribution.This means that any slowdown

in Chinese demand for base metals is likely

to be minimal.

Even given a slowdown in Asian growth,

the outlook for base metals still remains

positive. Current growth rates in Asia and

India are 8-9 per cent. However, growth at

just 2-3 per cent per year would still be

sufficiently high to ensure strong global

economies tends to be on consumer goods.

This ‘developing world’ pattern of capital

spending is recognised as adding a long-

term positive non-cyclical factor to metal

demand compared with the more cyclical

nature of demand in the developed world.

By 2006, world aluminium consumption

will exceed 30 million tonnes and China

will be consuming almost 20 per cent of

the world’s primary aluminium. Many

ongoing smelter expansions and greenfield

developments are now taking place in

China, which including closures, added 2.1

million tonnes to world primary capacity in

2002 and 2003.The concern in the market

demand for base metals well into the

foreseeable future.

“China will remain the major engine for

growth for all the base metals for the

remainder of the decade, although

economic growth will slow, if for no other

reason than it will be taking place from a

higher base,” says Angus MacMillan,

minerals strategist at Prudential Bache.

This steady Asian growth is also likely to

change the cyclical nature of base metals

demand. In China, 82 per cent of capital

spending goes on housing and

infrastructure. By comparison, capital

spending in the more established

Appetite forbase metals remains voracious

THERINGSIDER


65

Much of the projected capacity growth forrefined zinc in 2004 and 2005 is in China


apace,” says MacMillan.

China overtook the US as the world’s

largest consumer of copper in 2002 and is

forecast to overtake it in aluminium in 2005.

The country’s rapid industrialisation is taking

the lead. Indeed, between 1997 and 2003

global refined copper consumption was at a

compound annual growth rate of 3.3 per

cent. However, without China the rest of the

world’s rate was only 1.3 per cent per year.

While the development of China’s

infrastructure is creating massive new

demand for copper it is also contributing

to copper consumption growth in

neighbouring countries, most notably

Taiwan, South Korea and Japan, as these

nations use copper to produce goods for

export to China. As per-capita refined

copper consumption is only 25 per cent

of the level in Western Europe, the United

States and Japan, there is as yet no end in

sight to the ongoing growth.

Much of the projected capacity growth

for refined zinc in 2004 and 2005 is in

China, which is already the biggest

producing country. The International

Lead and Zinc Study Group (ILZSG)

forecasts a rise in demand of 8.7 per cent

for Chinese refined zinc in 2005.

According to the ILZSG, Chinese net

imports of refined zinc will exceed

100,000 tonnes in 2005.

Elsewhere in Asia, expansions at

Vedanta’s Hindustan Zinc operations will

result in a significant 28 per cent rise in

Indian output. Production is also expected

to be higher in Japan, Kazakhstan and the

Republic of Korea.

The ILZSG also sees the role of China as

pivotal in the global market for refined lead.

It forecasts a rise in global demand for

refined lead metal of 2.5 per cent in 2005, to

7.25 million tonnes.The main growth will

again be in China, where usage is expected

to increase by 8.1 per cent. Chinese demand

is also expected to reach a record high in

2005, with imports of lead contained in lead

concentrates expected to be around 430,000

tonnes in 2005. Net exports of refined lead

metal from China will be less than 360,000

tonnes, according to ILZSG estimates.

As with the other base metals, Asia,

is that unless the government succeeds in

reversing the current expansion process

new capacity could exceed demand.

Elsewhere in the Asian region, both supply

and demand are on the increase in the

Indian sub-continent, where industrial

growth per annum is so high it is often

referred to as the ‘next China’.While per capita

consumption of aluminium in China is 4kg,

compared with nearly 20kg in the US and

Europe, in India, which has a population of 1

billion, consumption is still under 1kg.This is

encouraging as it shows that the market is at

the very earliest stage of development.

The Asian region is now the focus for

copper demand growth, surging ahead of

Western Europe and North America.

Growth is spurred by the leap forward in

the development of electricity and

telecommunications networks and the

expansion of transport infrastructure and

motor vehicles.

“Demand from the expansion of China’s

infrastructure, particularly the need for

power, and the growth of its industrial base

will ensure that copper demand grows



particularly China, is the key to

understanding the phenomenal rise in

nickel prices. In the case of China, massive

investment in stainless steel capacity in

recent years, combined with start-up

problems at some new nickel mining

operations, resulted in a shortfall in the

supply of nickel. However, nickel mine

supply is now on the rise and this,

combined with the growth in the use of

recycled stainless steel and the shift away

from nickel toward ferritic grades, could put

a lid on further price rises for the remainder

of 2005 and beyond.

Chinese nickel demand is forecast to

grow by more than 30 per cent in 2005;

however there are indications that high

prices appear to be affecting consumption

in China and resulting in a decline in year-

on-year growth. Such is the weight of the

Chinese market that this growth slowdown

will result in reduced global consumption

growth in 2005.

China and Indonesia are by far the

largest tin mining and refining countries

and, together with Peru, they account for

an overwhelming amount of the world’s

tin mine and refined tin production.

Tin mining in Asia comprises

thousands of small non-mechanised

mines and a few more modern, larger

operations, such as China’s Yunnan Tin.

While Chinese production is growing, the

increased output is being absorbed by

domestic demand.

Demand for tin has been greatly

enhanced by the move to lead-free solders,

backed up by legislation in Europe, Japan

and China. Solders are being replaced

chiefly with solders containing over 95 per

cent tin, creating a 35 per cent increase in

tin demand.The conversion is expected to

be almost total in Japan and Europe by the

end of 2006.

The voracious Asian appetite for base

metals that has been so much a feature of

recent years seems unlikely to diminish in

the near future. China is continuing to lead

the way and, with the financial backing of

their government, Chinese companies are

bankrolling new mining projects in Brazil

and elsewhere to ensure a steady source of

raw materials for their smelters.

Tin mining in Asia comprises thousands of small non-mechanised mines and a few more modern, larger operations

THERINGSIDER

REGIONAL DEVELOPMENTS: AUSTRALIA


A MORE THAN 50 PER CENT RISE IN AUSTRALIA’S EXPENDITURE ON BASE METALS EXPLORATION REFLECTS OPTIMISM ABOUT CONTINUING INDUSTRIAL GROWTH IN ASIA. DAVID FRENSHAM REPORTS

A key plank in Australia’s Asia strategy is

China and in May 2005 the Minerals

Council of Australia entered into a co-

operation agreement and launched a

business-to-business dialogue with the

China Chamber of Commerce of Metals,

Minerals, and Chemicals Importers and

Exporters (CCCMC) to strengthen Sino-

Australian trade and investment. The

Australia’s well-endowed base metals

sector counts on continued growth in

Asia as a market for new mine and

smelter projects. The country’s metal ore

mining industry has a high level of

exports, which generate more than a

quarter of the industry’s turnover. In

2004-2005, base metals exploration

expenditure in Australia rose by 57 per

Claims of over-reliance on Chinese demand dismissed

cent to $238 million. This increase was

mainly attributable to strong rises in

expenditure on nickel and copper

exploration, up 67 per cent and 77 per

cent respectively. This expenditure, in real

terms the highest it has been since 1997-

98, reflects the optimism of the Australian

metals mining industry about continued

Asian industrial growth.

THERINGSIDER


71

Australia is the world’s largest producerand exporter of bauxite and alumina andthe fifth-largest producer of aluminium


Australian alumina, there is still room for

growth there and there are also

alternative markets.”

Australia’s minerals sector has been

gearing up for a number of years to

meet the growth challenge from India

and China. Australian minerals producers

are also keen to invest in China but are

anxious that restrictions to investment

be minimised.

Australia is the world’s largest producer

and exporter of bauxite and alumina and

the fifth-largest producer of aluminium.

However, a real concern for the Australian

aluminium industry is that it is becoming

less cost-competitive as new countries

enter the market with cheaper smelters.

According to AME Mineral Economics,

Australia has fallen from being in the top

ten in terms of cost-competitiveness in

2000 to around 15th from a total of 37

countries active in the aluminium market.

The underlying reasons include an

appreciating Australian dollar and rising

electricity prices.

AME’s aluminium industry analyst Rob

Bishop says there has been “a massive

supply shortage of alumina”, which has

driven up the spot market price threefold.

However, the price of aluminium has only

gone up 35 per cent. The global market for

aluminium is set to grow by an annual 4.8

per cent a year over the coming years to

39 million tonnes by 2009 with China

accounting for more than a quarter of the

growth. Australia’s production is set to

outstrip that rate and is forecast to

increase by eight per cent over the next

four years.

China is a major market for Australian

copper and exports to China rose by 30

per cent in 2004 to A$1.6 billion. Despite

the growing strength of the Australian

dollar in mid-2005, faster than expected

economic growth in China in first-half

2005 provided a boost to Australia’s

copper industry in 2005 and the outlook

for 2006 continues to be positive.

move was part of a comprehensive

bilateral free trade agreement.

In 2004, Australian nickel exports to

China grew by 88 per cent to $142

million, copper sales expanded by 35 per

cent to $156 million and sales of

aluminium grew by around 26 per cent to

more than $1.2 billion.

Concerns that Australian mine projects

are overly reliant on Chinese industrial

growth are dismissed and analysts argue

that even in the unlikely event of a

downturn in China there are plenty of

other options.

“For most of the LME metals, Australia

doesn’t really need a Plan B,” says Neil

Buxton, managing director, GFMS Metals

Consulting.“Nickel is the obvious example.

The structural shortage of feed globally is

such that Australia will always find a home

for its nickel concentrates and

intermediate products. In the case of

alumina, notwithstanding possible tax

changes to discourage Chinese tolling of

Commodity Project Location Company Capital expenditure $m

Copper Tritton NSW Tritton Resources 40

Whim Creek WA Straits Resources 23

Gold Cracow Qld Newcrest/Sedimentary 89

Daisy-Milano WA Perilya na

Fosterville Vic Perseverence 9

Stawell expansion Vic Leviathon Resources 10

St Ives WA Gold Fields Australasia 125

Telfer redevelopment WA Newcrest 1400

Iron ore Mining Area C expansion WA BHP Billiton 152

Lead/zinc/silver Black Star openpit QLD Xstrata 28

Magellan Lead project (St1) WA Magellan Metals 48

Nickel Black Swan WA LionOre 55

Bauxite Weipa expansion (NeWeipa) Qld Comalco 232

Source: ABARE

Major mineral resource developments: projects completed, November 2004 to April 2005



Australia leads the world in mine

production of lead and is the world’s

largest exporter of lead, with the bulk

of Australian production exported as

lead bullion to the United Kingdom

and quantities to South Korea. Of the

rest, lead in ores and concentrates

goes mainly to Japan for further

processing, while refined lead is sent

to Taiwan, South Korea, Indonesia, India

and Malaysia.

Australia exports zinc as refined metal

to a broad range of destinations in the

Asia Pacific area, from India to the USA,

but mainly to Indonesia, Hong Kong,

Chinese Taipei and Malaysia. Major

customers for zinc in ores and

concentrates are Japan and South Korea,

and to a lesser extent Belgium, Germany

and the United Kingdom.

The surge in demand from China for

galvanised steel, which helped LME zinc

prices rise by 25 per cent during first half

2005, has greatly benefited Australian

zinc producers such as Zinifex Ltd. The

world’s second-biggest zinc producer

saw its share price rise by 58 per cent

over the 12-month period to July 2005.

The outlook for 2006 is for steady though

perhaps less spectacular growth.

Higher nickel prices have generated an

increase in small-scale nickel production

projects in Western Australia, which are

likely to impact in 2005-06.These projects

are expected to bring an additional supply

of 15-20,000 tonnes of nickel in 2005 and

25-30,000 tonnes in 2006. In 2005,

Australia’s nickel sales to China surged by

88 per cent in response to increased

demand from the stainless steel sector.

Fox Resources Ltd has a three-year

agreement to sell nickel-bearing ore

concentrate to China’s largest nickel

producer, Jinchuan Group, for stainless

steel. Jinchuan has also struck supply

pacts with fellow Australians WMC

Resources Ltd, WMR and Sally Malay

Mining Ltd. The company forecasts that

nickel consumption in China will rise by a

third by 2006 to 160,000 tonnes a year,

owing to rapid industrial expansion.

Australia’s geographical proximity to

Asia, coupled with its vast metals

resource base makes it uniquely well-

suited to supply into a rising market.

While the industrial outlook for the

Western countries is uncertain in the

coming years, the industrial outlook for

Asia – especially India and China – is

rosy. As a result, Australia’s nickel, copper

and other base metal projects will

continue to benefit.

SECTORAL DEVELOPMENTS: AUTOMOTIVE

THERINGSIDER 74

EVERY TIME YOU START YOUR CAR AND TAKE A DRIVE YOU ARE RELYING ON METALS YOUR CARMAKER BOUGHT REFERENCED TO LME PRICES. PAUL MILLBANK EXPLAINS WHERE TO LOOK TO FIND THE SIX TRADED METALS


Metals on the move

All the metals play roles of varying size andimportance, and without them the car aswe have come to know it could not exist

THERINGSIDER



Most of the LME-traded metals are very

different to each other; apart from being

commodities they have few common

characteristics. But one thing they do

share is their use, to a greater or lesser

degree, in the automotive sector.

Every class has its star pupil, and in the

metals-in-cars class, only one of the metals,

aluminium, is a really high achiever. It is

constantly expanding existing uses and

persistently driving forward into new ones.

That said, all the metals play roles of

varying size and importance, and without

them the car as we have come to know it

could not exist. So, putting aluminium to

one side for a moment, just what are the

roles of copper, lead, nickel, tin and zinc in

this fast growing, competitive, and very

performance- and image-conscious sector?

For copper, things were once a great deal

better than they are today. At one time all

vehicle radiators were made of copper and

copper alloy, but a couple of decades ago

aluminium capitalised on its lower density

to change that. In what at the time was a

weight-conscious car industry in the

aftermath of two oil crises, aluminium used

its weight-saving attributes to virtually

eclipse copper and brass.

Only in recent years has the red metal

staged a comeback, coupling new

lightweight designs which capitalise on its

superior thermal conductivity and

corrosion resistance, with modern

manufacturing techniques like laser

welding. But aluminium is not going to go

quietly, and it remains to be seen just how

much of the automotive market copper

can win back.

Meanwhile, as car output continues to

grow year-on-year, and on-board systems

become ever more complex, copper

enjoys steadily growing demand in wiring

systems, as well as continuing to feature in

a range of conventional engineered brass

and bronze alloy components.

Lead is probably the most inert of the

metals in terms of creating new

opportunities. For a long time it has

been on the defensive across all

application sectors, seeing its

applications gradually shrink in the face

of unrelenting environmental pressures.

If a realistic alternative was available,

lead would probably already be

legislated out of its most important

market – the automotive battery.

exhaust systems have also enjoyed much

growth, but the grades used for these

contain very little or no nickel.

Tin has a similarly low profile. Its key

role is in solder for wiring connectors and

on electronic circuit boards.

Zinc, once only present as diecast

components, as an essential element in

brass alloys, and as zinc oxide in motor

tyre manufacture, has single-handedly

transformed vehicle performance over the

last two decades.

The adoption of zinc galvanised steel

has virtually eliminated corrosion, and

perforation warranties on offer today

would have been unthinkable 25 years

ago. Industry sources put total automotive

zinc consumption at more than 600,000

tonnes annually, just under 10 per cent of

global demand.

The lead-acid car battery accounts for at

least 50 per cent of global lead demand

according to industry sources, and will

continue to do so for a long time to come.

This equates to around 3.5 million tonnes

of lead a year, much of it recycled. No

alternative power source is anywhere near

ready to challenge the heavy

discharge/recharge characteristics of this

battery, so current investors in lead are not

facing any snap decisions.

Nickel’s automotive role is far less

apparent. The metal is a key alloy in

certain stainless steels. Some of these find

applications in powertrain and

transmission components, and sometimes

as trim. And although they do not play a

major role, stainless steels help to broaden

the choice of engineering materials

available to car designers. Stainless steel



Today the automotive industry is aluminium’sfastest growing and most valuable market

And so to aluminium. This metal’s key to

success is its weight-saving potential

combined with good manufacturing

characteristics, a well developed supply

chain and an ambitious producer sector.

Today the automotive industry is

aluminium’s fastest growing and most

valuable market. Industry statistics show it

accounts for almost 20 per cent of global

demand, representing more than 7.5

million tonnes per year of primary and

secondary (recycled) metal.

Although all-aluminium car designs

such as those from Germany’s Audi and,

more recently Jaguar have attracted much

publicity, this is not the way the volume

car industry is heading. Not yet anyway.

Aluminium is a long way from being the

material of choice for major car body

plants. Strong competition from a new

generation of steels, weight-saving vehicle

body design concepts especially

developed by the steel industry, the car

industry’s huge capital investment and

long experience in steel-based car

production shut this metal out of

everything except relatively low volume

and high performance vehicle production.

Away from the public gaze, however, the

metal has still made massive inroads into

car design. It now holds a dominant

position in important applications such as

engines, is widely found in transmission,

final drive and suspension systems, and has

growing uses as closures (boot lids, bonnets

and sometimes doors), various structural

parts, crash management systems and

wheels. As already mentioned, it has

virtually stolen the heat exchanger

(radiators) market from copper, and is also

challenging this metal for a share of the

wiring harness business.

Cars are getting heavier as customers

increasingly put performance, comfort,

convenience and add-on features above

economy. But that is not to say

manufacturers are not looking to save

weight where they can; ever tougher fuel

economy and emissions legislation are a

fact of life.

Aluminium, and in particular

secondary aluminium, now dominates

engine cylinder head production and

enjoys a rising share of the engine block

market. These are large items requiring a

lot of metal, and in developed markets

you would now be hard pressed to find

a car not equipped with a cast

aluminium engine.

The metal’s good energy-absorbing

characteristics have also led to its use for

front-end bumper beams – the structure

behind the bumper. Millions are now

being produced annually. Side impact

beams fitted inside doors for crash

protection are another new application.

It all adds up to ever greater demand for

the metal. Major aluminium producer Alcoa

projects aluminium use per North

American vehicle will grow from 258 lb

(117 kg) in 2000 to 318 lb (144 kg) in 2010,

will rise from 196 lb (89 kg) to 268 lb (122

kg) over the same period in Europe, and

move up from 212 lb (96 kg) to 263 lb (119

kg) in Japan.The European Aluminium

Association believes use per car in the

region has already reached 331 lb (150 kg).


SECTORAL DEVELOPMENTS: ELECTRICAL AND ELECTRONIC

The growth in Asian and Latin American

power generation projects, combined

with the impressive global growth in

telecommunications in the developed

world, has helped the growth in global

demand for copper. Although the

Chinese government is making efforts to

cool Chinese economic growth they are

firmly wedded to the promotion of

copper-intensive power generation and

distribution projects. In 2004 the

government approved 61.1 million KW of

new power capacity – a doubling of the

2003 level. The forecast for full-year 2005

is of a rise to 70 million KW, which should

help Chinese copper consumption

register a double-digit rise.

In today’s rapidly expanding

communications climate homeowners

are increasingly demanding multiple

phone lines, broadband internet

services, etc. Although optical fibre has

displaced copper in part of the

distribution system, this has actually led

to an increase in demand for copper, as

the metal continues to be the preferred

carrier for the last mile, or segment into

the home. In power transmission lines

aluminium, which is almost twice as

good a conductor as copper in relation

to its weight, is the most commonly

used material.

In the electronics market the high price

of palladium is beginning to benefit base

metals such as nickel, increasingly used as

a substitute in cellular phones and other

consumer electronic goods (CEGs).

The development of China’s power

generation and transmission

infrastructure, as witnessed through

mega-projects like the Three Gorges Dam,

is taking place at an accelerated pace.

Zhou Heliang, executive vice president of

the China Electrotechnical Society (CES),

has said that China’s installed power-

generating capacity will experience

significant growth until 2020.

“China had 380 million kilowatts of

installed power-generating capacity at the

end of 2003,” Mr Zhou said.“This level is

expected to exceed 450 million kilowatts

by 2005, 650 million kilowatts by 2010 and

around 950 million kilowatts by 2020.”

In addition to this new capacity, China is

also determined to become more energy

efficient. Currently, energy efficiency

stands at just 33 per cent, or ten

percentage points lower than that of other

developed countries. China’s energy

consumption per unit output value is

twice as much as that of other developed

countries. The country is therefore making

great strides in power management to

meet its energy needs. Demand for

electricity in China is increasing by 14-15

per cent per annum and domestic white

goods such as refrigerators and air

conditioners – all major markets for

copper – comprise approximately 10 per

cent of the total demand. During the

summer months, power consumption

increases by 40 per cent.

There has also been a massive growth in

the demand for CEGs in China in recent

years and the CEG market is now very

mature. Indeed, the market has shifted

away from earlier attempts to reach every

home with a ‘first sale’, to targeting

consumers who wish to upgrade their TV,

hi-fi or video.

The use of tin and copper in place of

lead in the manufacture of electronic

goods is expected to accelerate as, by July

2006, nearly all electronics goods entering

the European market will have to be lead-

free. The emergence of new European

legislation such as the Waste from

Electrical and Electronic Equipment

(WEEE) and Restriction of Hazardous

Substances (RoHS) directives has focused

the electronics industry’s attention on the

question of recycling and the proscription

of lead in electronics assembly.

Lead is still widely used in the

electronics industry, principally as a

constituent of solders but also in certain

components and in the Printed Circuit

Board (PCB) manufacturing process.

The legislation will have a considerable

effect on the manufacturers of electrical

and electronic goods outside the

European Union who wish to sell into the

THE OUTLOOK IN THE ELECTRICAL AND ELECTRONIC MARKETS, PARTICULARLY FORCOPPER AND ALUMINIUM, CONTINUES TO LOOK HEALTHY WITH THE ADVENT OF NEWASIAN AND LATIN AMERICAN POWER GENERATION PROJECTS. THE DEVELOPMENT OFNEW CONSUMER ELECTRONIC PRODUCTS, COMBINED WITH ENVIRONMENTALLEGISLATION, WILL SEE METALS LIKE TIN AND NICKEL INCREASINGLY BEINGSUBSTITUTED FOR LEAD AND PALLADIUM. ROBIN DEVEREUX REPORTS

Base metals benefit as developingeconomies mature

China’s energy consumption per unit output value istwice as much as that of other developed countries

tracks of the printed circuit board (PCB)

and the component terminations.

Copper can be removed from tin, where

it is likely to end up in the recycling of

electronic circuitry, relatively easily. Copper

also happens to be the cheapest alloying

addition, other than lead, which does not

introduce other complications. Zinc, for

example, can be, and is, used as an

alloying addition to tin to make solders,

but the reactivity of the resulting alloy

imposes severe limitations on its

application.

It has been shown that by modifying

the tin-copper eutectic with an addition of

less than 0.1 per cent nickel, dramatic

improvements can be made to the

appearance of the alloy. This Japanese

development has allowed Japan to set the

international pace in developing and

adopting lead-free solder since the late

1990s. The proportion of lead-free solder

used in Japan is growing constantly and

by 2005, 60 per cent of all solder used by

Japanese companies was lead-free. Lead-

free solder use is also growing among

other countries in Asia, particularly those

where Japanese factories are located or

those that produce for Japanese clients.

European market. Already, Japan has

moved into the vanguard of countries

manufacturing electronic goods using

lead-free solder.

One lead alternative is a tin-copper

eutectic (Sn- 0.7Cu), which has been

identified as one of the most likely

candidates for the replacement of the

industry standard tin-lead eutectic

(nominally Sn-37Pb). Toxicity is the

primary concern driving the elimination of

lead, and the fact that copper is generally

regarded as non-toxic is a key advantage.

Virtually all electronic circuitry already has

a substantial amount of copper in the

SECTORAL DEVELOPMENTS: ELECTRICAL AND ELECTRONIC


THERINGSIDER

INDUSTRY ISSUES: MINING


THE METALS MINING INDUSTRY IS STILL ENJOYING THE BONANZA THAT BEGAN IN LATE 2002, REPORTS SANDRA BUCHANAN

Despite the rising cost of inputs and, in

some cases, the negative impact of

exchange rate movements, profits for the

global mining sector doubled in 2004 for

the second year, according to

PricewaterhouseCoopers. In response to

strong demand, mine output for all LME

metals grew in the second half of 2004

meantime, China is making progress with

its own mining operations.

The copper surplus came as a surprise.

A number of production problems –

notably at Escondida (Chile) and

Grasberg (Indonesia) – threatened to cut

forecasts for growth in 2004, but new

capacity more than compensated.

and first half of 2005, but concentrate

markets are still tight except for copper,

which was in oversupply.

While tightness is good for prices,

miners are anxious to bring on new

capacity while demand lasts. However,

much of the new planned capacity is still

two, three or four years away. And in the

Profits double forsecond year running



CVRD’s greenfield copper mine Sossego

came on-stream, Phelps Dodge’s

mothballed capacity in Arizona was

reactivated and the Zambian copper belt

had its best year since the mines were

privatised in 2000.

The result was a rise of 7-8 per cent of

copper-in-concentrate year-on-year.

Forecasts for mine production in 2005

range from 15 million tonnes to over 17

million tonnes, though a number of

strikes, accidents and one earthquake

(affecting BHP Billiton-operated Cerro

Colorado in Chile) disrupted supply.

Projections by the International Copper

Study Group (ICSG) say that by 2008

copper mine capacity will grow by another

3.2 million tonnes to 19 million tonnes,

although that includes over a million

tonnes of capacity still in the exploration

and feasibility stage.

After a couple of tight years for nickel,

increases from small expansions in 2004 and

2005 have eased the market, according to

the International Nickel Study Group (INSG).

Of the two biggest producers, each with a 20

per cent market share, Inco’s output will fall

slightly in 2005 and Norilsk Nickel’s remain

flat. However, 2006 will see first production

from Inco’s jackpot at Voisey’s Bay in Canada.

The Australian junior nickel-laterite

sector has performed better since a

degree of consolidation was achieved

under LionOre last year, and if the pressure

acid leach technology at BHP Billiton’s

Ravensthorpe mine proves commercially

viable, the smaller operators should be

able to find financing.

UK consultancy Brook Hunt forecasts

that another 40,000 tonnes of nickel mine

production will be needed by 2008. Inco,

which sells into China’s enormous nickel

Forecasts for mine production in 2005 range from 15 milliontonnes to over 17 million tonnes

THERINGSIDER



Expanding reserves is uppermost in the minds of mining companies

plate market, has suggested that Chinese

consumption could double by then.

Although Inco’s Goro project in New

Caledonia has run into financial

difficulties, there are others to take up the

slack. One favourite is Canico’s high-grade

deposit in Brazil, another is Anglo

American’s Barro Alto, also in Brazil.

Extreme tightness in alumina supply

could bring problems for the aluminium

industry. Rio Tinto’s Comalco – the first

new greenfield alumina refinery in almost

20 years – started up in January, and with

other committed expansions there should

be enough alumina to offset demand

from new smelter capacity, at least for the

near future, according to UK metals

industry consultant James King.

There is no shortage of bauxite in the

ground, but King warns against the

unforeseen: environmental restrictions in

Brazil and India, for example, could

prevent or delay mining of some of the

world’s best reserves. Guinea has an

“inexhaustible supply” of bauxite as well

as supportive authorities, but alumina

refining capacity is being developed

only slowly.

Overall increases in lead and zinc mine

production are mostly due to steady

growth in Asia over the last four years, in

contrast with the decline in western

world mining. India’s Hindustan Zinc

stands out for its 33 per cent rise in zinc

mine output in 2004, but the market is in

deficit. The closure of Sudamin in

Germany due to high energy costs has

taken 100,000 tonnes of capacity out of

the global market.

The lead concentrate market is

probably the tightest of all. Output fell in

2004, particularly in North America where

Doe Run and Teck Cominco failed to meet

expectations, and Chinese imports rose.

Doe Run shut some mines when the lead

price was low, and a strike at Teck

Cominco’s Trail lead-zinc operation in the

summer of 2005 cut production.

Mine supply from Australia, Europe and

China is expected to grow considerably in

2005, and new mining in Australia and


THERINGSIDER 86

Bolivia will realise another 350,000 tonnes

by 2007.

Tin miners were caught out by a surge

in demand in 2004, despite a rise of 12 per

cent in output to 287,000 tonnes,

according to the International Tin

Research Institute. PT Timah in Indonesia

found itself short of concentrate to feed

its smelter last year, and even the

numerous small-scale swing miners in the

area failed to make up the difference.

Brazil’s Paranapanema will produce more

from its Rocha Sa mine in the 2005-2007

period, and China is raising output from its

considerable tin reserves.

Expanding reserves is uppermost in the

minds of mining companies. In 2003-04

there was an explosion of spending on

acquisitions, but when the consolidation

trend declined, exploration activities

increased. There are still risks to be

considered, but London risk service

provider AON reports that many

developing countries are now bankable,

and cites the World Bank’s decision to offer

political risk insurance for the Democratic

Republic of Congo. Low operating costs

remain the chief mitigating risk factor.

Spending on exploration for all non-

ferrous metals grew by 58 per cent in 2004

to $3.2 billion – the highest since the 1997

peak of $5.2 billion, according to the Metals

Economics Group (MEG). Exploration by

juniors accounts for 60 per cent of the

increase and almost 45 per cent of the

overall spend. MEG’s methodology, using

exploration budgets (not expenditure) of

1,138 companies, estimates that the spend

for copper grew from US$340 million in

2003 to $577 million in 2004, for nickel from

$170 million to $259 million, and for lead-

zinc from $75 million to $101 million.

2005 will see another, more modest rise

in exploration investment, according to

MEG. PricewaterhouseCoopers says the

numbers are still not high enough, but

notes that investment has to be balanced

with long lead times. However, long

lead times mean another bumper year

for mining.

Sandra Buchanan is associate editor of

Metal Bulletin Monthly

THERINGSIDER

INDUSTRY ISSUES: TRENDS IN ALUMINIUM SMELTING

89

KEN STANFORD LOOKS AT THE RAPIDLY CHANGING DYNAMICS OF GLOBAL ALUMINIUM SMELTING


Traditionally, global primary aluminium

production has been dominated by a

handful of mature, international players.

But now, through changing competitive

world dynamics, the industry is evolving

and faces various challenges, in particular

competition for energy and raw materials

and more stringent environmental

a third of all metal produced since 1900

being made in the past ten years. A major

part of this growth was from China, where

output had grown 15 per cent per year

since 1990. Chinese production then

represented 3 per cent of world output –

today it accounts for the world’s largest at

19 per cent capacity. In comparison, the

regulations. New players are emerging

too, boosting their share of the current

total world output of primary metal, which

stands at some 23 million tonnes*.

Cynthia Carroll, president and CEO of

one of the more mature majors, Alcan

primary metal group, notes that output of

aluminium is growing exponentially, with

A global transformation

THERINGSIDER



Global consumption remains strong,growing on average by some 9.7 per cent per annum since 1990

the company operates nine alumina

refineries with a total capacity of 14

million tonnes and 27 smelters producing

4 million tonnes of primary metal.

The greatest revenue was generated

not by primary production (25 per cent)

but from downstream operations, of

which fabricated products accounted for

49 per cent, transport 26 per cent and

consumer and packaging 25 per cent.

Alcoa vice president Bernt Reitan

believes that expanding capacity should

not be undertaken unless driven by

customer demand, noting that global

capacity was already over 60 million

tonnes a year against an output of 33.7

million tonnes in 2004.

Sustainability in all its operations is a

priority for Alcoa, which has reduced GHG

emissions by 25 per cent, water use by 16

per cent and landfill by 44 per cent. New

technologies under investigation by Alcoa

include inert anodes, carbothermic

reduction and higher yield routes for

alumina production.

Norway-based Hydro Aluminium, which

celebrated its 100th anniversary in 2005, is

now in the top set of producers after taking

over VAW a few years ago. It produced

some 1.6 million tonnes of primary

USA has 13 per cent, Canada 9 per cent,

Western Europe 13 per cent and the CIS

15 per cent.

Global consumption remains strong,

growing on average by some 9.7 per cent

per annum since 1990.

Putting the energy demand in

perspective, according to the latest

figures from the International Aluminium

Institute (IAI), in 2004 the total amount of

electrical power used by IAI member

companies to produce primary

aluminium was 266,322 GigaWatt hours

(GWhr), accounting for around half of

global production, with an average figure

per metric tonne produced of 15,202

kWhr. In 2004, member companies

reported 17,519,048 metric tonnes of

primary aluminium production. Some

technological developments in

aluminium electrolysis at Alcan include

increasingly larger pot sizes, reducing

GHG emissions and radically new

reduction cell design based on inert

anodes, drained cathodes and

carbothermic reduction.

Another mature player and the world’s

largest producer, Alcoa had 2004 revenues

of US$23 billion, with 11,900 employees

working across 450 global locations. Today



“We are in the midst of a markettransformation and growth similar to the one experienced in the 1950s”

Søderberg technology. A new smelter

being built in Khakassk will employ the

latest cell technology based on pre-baked

anodes. Several of RUSAL’s four existing

smelters are undergoing major

modernisation programmes and

upgrades, especially at Krasnoyarsk and

Sayanogorsk. Through these various

measures, RUSAL’s stated intention is to

boost overall output of primary

aluminium to 5 million tonnes by 2013. A

higher proportion of added-value

products will also feature in this mix.

Russia’s second largest primary

producer, and the world’s sixth largest,

SUAL had an output of 920kt in 2004 and

a revenue of US$1.7 billion, based on low-

cost production, some 80 per cent lower, it

claims, than the world average.

SUAL is self-sufficient in alumina

supplies. In 2004 it mined 5.02 million

tonnes of bauxite – 84 per cent of Russia’s

total – and refined 2.1 million of alumina,

63 per cent of Russia’s output.The company

has all 19 of its operations in Russia but has

an international senior management.

SUAL is currently investing US$2.1

billion in Russia’s first greenfield

aluminium facility in 50 years. Located in

central Russia, with access to the Middle

Timan bauxite deposits, the Komi project

comprises a 1.4 million tpy alumina

refinery and a 300-500ktpy smelter.

Without doubt, the greatest growth in

primary aluminium in recent years has

been seen in China, where the

Aluminium Corporation of China

(Chalco) is the leading producer. The

company refined 6.82 million tonnes of

alumina in 2004 but produced just 770

kt of metal due to power shortages.

Chalco, which operates four large

integrated plants and two additional

alumina refineries, is China’s sole alumina

producer and output has been

increasing 14 per cent/yr. But demand is

outrunning supply, necessitating 5.9

million tonnes of imports in 2004 – up

4.8 per cent from the previous year –

mainly from India and Australia.

Chalco is the first Chinese producer to

shut down its Søderberg cells in favour of

pre-baked anode technology and uses

modern handling systems on its pot lines.

Power consumption for smelting is 13.2-

13.6 kWhr/kg metal.

Further developments include new

sintering technology, computer

simulation of cells, improved electrode

efficiencies and increasing cell life. New

smelting methods are also under

investigation, including thermal carbon

reduction, direct alloy smelting, and inert

anodes and cathodes.

The wider present and future scenario

was aptly set out by a leading authority,

Alcoa chairman and CEO Alain Belda,

speaking in Chicago in early 2005.“We

are in the midst of a market

transformation and growth similar to

the one experienced in the 1950s,” Belda

said. He firmly believes that the focus of

growth will not be the USA or Western

Europe but rather in the ‘BRICK’

countries (Brazil, Russia, India, China and

Korea), driven by increased consumption

and urbanisation, and availability of

cheaper labour and resources,

particularly power supplies.

In the BRICK countries, Belda stresses,

it will all be about infrastructure

building, consumer awakening,

transportation, energy communications

and long runs of simpler commodity

products. It is clear we are seeing

profound and unprecedented changes

throughout the sector.

* Statistics according to the International

Aluminium Institute (IAI), London

www.world-aluminium.org

aluminium in 2004, but total output was

more than double this, at 3.5 million tonnes

made up from secondary metal.

Truls Gautesen, president of the

company’s primary metal division,

explains that the costs of primary

production are dominated by the cost of

alumina – in Hydro’s case, 40 per cent.

Power accounts for 21 per cent, carbon 8

per cent, labour 13 per cent. The major

cost of alumina is determined by world

factors. Gautesen says technologies are

being developed to handle more difficult

ores in cell operation.

Hydro’s new Sunndal smelter in Norway

boasts what is believed to be the best

environmental performance in the world.

The company is currently building a

570kt/yr smelter in Qatar at a cost of US$3

billion using high current density cell

technology similar to that developed for

Sunndal. Hydro owns 49 per cent of the

facility, with the Qatar government

holding the remaining 51 per cent via

Qatar Petroleum.

Of the newer global players in primary

aluminium, two Russian organisations –

RUSAL and SUAL – have developed from

former disseminated company groupings

and have grown remarkably in the last

five years.

Moscow-based RUSAL is now a globally

competitive company and is in the process

of continually building and striving

towards a technological edge. It produced

2.62 million tonnes of primary metal in

2004 from plants in Russia and 11 foreign

countries, employing over 60,000 people

worldwide. It now has dynamic new

management and divisional structures in

place to drive its plans forward.

Although RUSAL has a deficit of alumina

it enjoys ample low-cost power – less than

US$0.1/kWhr – from hydroelectric plants

in Siberia. While most of its smelters are

old they are still very productive, using

INDUSTRY ISSUES: EXTRUSION

THERINGSIDER 94

WITH INDUSTRIAL DEMAND IN ASIA SHOWING NO SIGNS OF SLOWING DOWN ANDINDICATIONS OF A DEMAND-LED RECOVERY IN NORTH AMERICA, THE INDICATIONSARE THAT THE KEY CONSTRUCTION AND AUTOMOTIVE SECTORS WILL CONTINUE TO GROW, PROVIDING A STEADY GROWTH IN THE MARKET FOR EXTRUSIONS. NNAMDI ANYADIKE REPORTS


Construction andtransport underpinninggrowth in demand

THERINGSIDER



Demand for extrusions can be a reliable

indicator of economic and industrial

health as they have so many end-use

applications. In Europe, aluminium

extruded products constitute more than

50 per cent of the market for aluminium

products, of which the building industry

consumes the majority. Aluminium

extrusions are used in commercial and

domestic buildings for window and

doorframe systems, roofing and exterior

cladding, etc. Extrusions are also

increasingly used in mass transport for

airframes, road and rail vehicles and in

marine applications.

The demand for aluminium extrusions

is also growing in the automotive sector.

Cast aluminium products account for

more than 80 per cent of current

aluminium automotive applications and

growth is rising; however, extruded

products in this market are growing at an

even faster rate.

Between 1980 and 2000, demand in

Europe for extruded products increased

steadily from 1.25 million tonnes to 2.45

million tonnes. In 2004 demand rose by 8

per cent from 2003 to 2.66 million tonnes.

European demand in 2005 is expected to

be around 2.7 million tonnes. The table

gives figures illustrating the growth for

aluminium extrusions in three key

markets, the US, Germany and Japan.

In North America, the slowdown in

airliner production due to three years of

depressed demand in the commercial

aircraft manufacturing industry affected

aluminium extrusions. However, in 2004

extrusion markets improved in the 3-5

per cent range and the growth in

demand from all extrusion sectors is

expected to be around 4-6 per cent

annually in the long term. The region has

been long on extrusion capacity and

from the construction sector is robust

and the growth in home ownership in

particular is fuelling extrusion demand

as consumers refurbish their homes. The

current economic climate is conducive

to construction activity with low

mortgage rates, which are keeping

housing affordable.

In Asia, construction of aluminium semi-

manufactured products (‘semis’) including

extrusions continues apace. China leads

the way with total semis production rising

each quarter from 2003, from 667,000

tonnes in first quarter 2003 to 1,250,400

tonnes in fourth quarter 2004. However,

China is also exporting increased

quantities of aluminium extrusions. Over

the same period, exports rose from 30,800

tonnes in first quarter 2003 to 68,900

order patterns are weak and inconsistent.

In the automotive sector, non-powertrain

applications in North American-built cars

and light-duty trucks are seen as prime

candidates for the expanded use of

extrusions in the coming years. Other

extruded aluminium applications being

investigated by automakers are side door

impact beams and instrument panel

supports, lift gates, engine cradles, radiator

enclosures, undercarriage cross members

and space frames.The average North

American lightweight motor vehicle is

forecast to contain 318 lbs (144 kg) of

aluminium sheet, bar and tubing by 2010,

up from 274 lbs (124 kg) in 2002.

In first-half 2005, North American

consumption of aluminium extrusions

stood at some 980,000 tonnes. Demand

The current economic climate is conduciveto construction activity with low mortgagerates, which are keeping housing affordable

‘000t 2003 2004 2005 (forecast)

USA

Shipments 1,695 1,867 1,921

year-on-year change -1.9% 10.2% 2.9%

Apparent consumption 1,909 2,095 2,155

year-on-year change 1.7% 9.8% 2.8%

Germany

Production 454 520 531


Apparent consumption 564 632 648

year-on-year change 2% 12.1% 2.5%

Japan

Production 1,022 1,053 1,087

year-on-year change 3.2% 3% 3.2%

Apparent consumption 1,011 1,059 1,092


(Source: MBR, AA, GDA, JAA)

Aluminium Extrusions Market Summary



tonnes in fourth quarter 2004. There is a

boom in the demand for larger extrusions

as the domestic heavy vehicle industry

begins to develop. However, there could

be a shortfall on the domestic market as

China is exporting billet for extrusions for

Germany’s high-speed trains.

Copper for extrusion purposes is

shipped to fabricators either in the form of

billet or as extruded shapes. Copper wire,

bars, rods and profiles can all be obtained

by extrusion as can hollow profiles

including finned or gilled tubes and pipes.

The most important copper end-use

sector in Europe is residential and non-

residential building construction, with a

share of just over 46 per cent. It is

estimated that copper use in building

construction will increase significantly

from the 1990s level of around 1.8

million tonnes to 2.3 million tonnes in

2006 and 2.6 million tonnes in 2010.

Within the construction sector, building

wire represents the most important

copper market.

Total semis production in Western

Europe (EU 15, Switzerland and Norway)

amounts to around 6 million tonnes of

copper, brass and alloy semis, including

wire and cable production. Semis

production in Western Europe is

dominated by wire and cable, followed by

bars, rods and shapes. Although Western

Europe is self-sufficient in terms of tube

and sheet production, a significant market

share of wire and cable consumption is

imported from abroad.

New housing starts and commercial

construction are important markets for

Heating, Ventilating, and Air-Conditioning

(HVAC), refrigeration and plumbing

markets, which in turn are key use areas

for copper extrusions. Repairs and

remodelling of single- and multi-family

housing and commercial buildings are

also important drivers for copper

extrusion products.

Despite the increase in the use of rival

materials for tubes and pipes such as

plastic, copper is still a byword for

reliability and it remains popular for use

in heating systems. Copper conducts heat

up to eight times better than other

metals and in any application involving

heat transfer its high thermal conductivity

provides an advantage. Copper collector

tubes are also increasingly being used in

solar energy systems.

In Asia the construction industry is

undergoing a boom as countries hit by

the December 2004 tsunami rebuild

houses and infrastructure, and China and

India continue to build and improve

upon their housing stock. Copper

extrusions are likely to benefit, as the

governments of both countries are keen

to ensure higher building standards

including adequate plumbing, etc. In

February 2005 India opened its

construction market to 100 per cent

foreign direct investment. In China, the

government is not only keen to move

away from poor quality construction, but

there are also projects underway such as

Western-style shopping malls.

With industrial demand in Asia

showing no signs of slowing down and

indications of a demand-led recovery in

North America, the indications are that

the key construction and automotive

sectors will continue to grow, providing a

steady growth in the market for

extrusions. The outlook for both copper

and aluminium extrusions is therefore

reasonably positive for the remainder of

2005 and into 2006.

INDUSTRY ISSUES: RECYCLING

THERINGSIDER 98

THE RECYCLING OF LME METALS, ALWAYS AN IMPORTANT PART OF THE NON-FERROUSMETALS INDUSTRY, IS GAINING IN IMPORTANCE AS ENVIRONMENTAL LEGISLATIONCOMBINED WITH A CRITICAL SHORTAGE OF PRIMARY FEED MATERIAL, IN THE CASE OFMETALS SUCH AS NICKEL AND COPPER, HAS PUT SCRAP AND SECONDARY METALFIRMLY IN THE MARKET SPOTLIGHT. NNAMDI ANYADIKE REPORTS


Regulations covering packaging waste,

end-of-life vehicles, landfill, etc, have all

impacted on the base metals industry and

compelled it to place a higher priority on

recovery and recycling.

Non-ferrous metals such as aluminium

and lead have always had a strong

secondary sector, reflecting the 100 per

cent recyclability of aluminium on the one

hand and the necessity on environmental

grounds to recycle automotive components

the primary nickel sector, resulting in the

high prices seen in 2005, nickel scrap and

ferro-nickel are in great demand.

Copper is one of the most recycled of

all metals, with some 40 per cent of

copper consumption in 2005 estimated

to come from recycled copper. Virtually

all products made from copper can be

recycled and copper-based products

have an average lifespan of 30 years. This

varies from a few years in electronic

such as the lead-acid Starting Lighting &

Ignition (SLI) battery, on the other.

Over the years, the use of lead has

increasingly been curtailed and it is now

largely confined to the car battery. As most

car batteries are recycled this makes lead

the most recycled of all LME metals. Nickel

is another LME metal with a strong scrap

recycling component; in many cases it is

actually preferred as a raw material to

mined primary nickel.With the tightness in

A thriving secondary market

Non-ferrous metals such as aluminium and leadhave always had a strong secondary sector

THERINGSIDER



devices, to over a 100 years in

architectural uses.

In first-half 2005, the tightness in the

primary copper market was reflected in the

secondary copper market. As with the

primary market, the role of China was

significant and analysts forecast that in full-

year 2005, China would have imported 4.5

million tonnes of raw recycled copper alloy

products in the form of engines, cables and

mixed metals with a copper content of 90

per cent or above.

In 2003, secondary copper production, at

1.709 million tonnes, formed 11 per cent of

the 15.015 million tonnes total global

refined copper production, according to

the Chilean Copper Commission. In 2004

and first-half 2005, total refined copper

production and secondary copper

production both increased in response to

high copper prices.The Commission

calculates global refined copper

production for the whole of 2005 at 16.943

million tonnes, of which secondary copper

is expected to account for 1.98 million

tonnes. Europe’s secondary copper

processors still fear shortages of copper

scrap for the remainder of 2005 and

European secondary copper smelters

Group, European steelworks have had to

face a weakening market situation as well

as some erosion in prices since the

beginning of 2005.

In the US, forward orders for new

business were not flowing. By contrast,

Asian demand was high, with the region

accounting for around 83 per cent of US

stainless steel scrap exports in the first

quarter of 2005, with China taking more

than half of this volume.

By mid-2005, the LME nickel price had

stabilised at around US$16,000 per tonne

but there were signs of a weakening in

scrap prices in anticipation of a further fall

in scrap purchases from European and

Chinese stainless steel mills. However,

nickel demand is still running ahead of

supply, buoyed by a positive outlook for

nickel in China and the wider Asian market.

Despite the first-half 2005 stainless steel

slowdown, the International Stainless Steel

Federation was predicting that global

stainless steel production will total around

25.8 million tonnes for the whole year,

around 5 per cent more than the 24.6

million tonnes recorded last year.

Production in Asia is expected to better

2004’s total by some 7.6 per cent.

continue to complain about the large

volumes exported to Asia.

In both China and the Far East, interest in

copper scrap picked up considerably in

mid-2005 as the rebound in LME prices

coincided with an increase in scrap prices.

In the first four months of 2005, China’s

copper scrap imports reached almost 1.5

million tonnes – equivalent to a year-on-

year increase of around 32 per cent. In the

Far East, high-grade scrap traded at steady

premiums while discounts for No 2 scrap

narrowed to reflect tighter market

conditions. By third-quarter 2005, there was

little sign of a slowdown in the South China

market following the increase in import

duties on scrap.

By far the most dominant end-use

market for nickel is the stainless steel sector

and in first-half 2005 there was evidence of

a slowdown in the European stainless steel

sector. According to the Bureau of

International Recycling (BIR), while

European stainless steel production

increased by almost 7 per cent in 2004 it

will only rise by 3 to 5 per cent in 2005.

According to the chairman of BIR’s Stainless

Steel & Special Alloys Committee, Sandro

Giuliani of Italy’s Giuliani Metalli-Cronimet

More than 97 per cent of all battery lead is recycled

THERINGSIDER


101

We can expect to see the recycling of LMEmetals grow in importance in the near term


Some 60 per cent of the lead supplies

used in battery manufacturing come

from recycled batteries and more than 97

per cent of all battery lead is recycled.

Indeed, without battery recycling, both

the availability and the price of lead

would radically change the business

climate of many battery manufacturing

operations. Compared to the 55 per cent

recycling rate of aluminium soft drink

and beer cans, lead-acid batteries are the

most highly recycled consumer product.

LME three-month primary lead prices

strengthened in 2005 as stocks declined to

critical levels.This has had an effect on

scrap lead prices, with prices rising in

Germany, a major battery manufacturing

region. Scrap prices have also risen in the

UK and the Netherlands. Meanwhile,

Chinese lead imports have shown a

marginal increase while exports decreased

by around 12 per cent in first-half 2005.

Zinc is recovered from a number of

sources such as galvanized steel, die cast

scrap, brass, etc and the metal forms a

significant feed source. From a total zinc

consumption of 9.6 million tonnes some

1.5 million tonnes of new scrap and

process residues will be produced, 100

per cent of which are recycled almost

immediately. The weighted average

lifetime of zinc products is about 30

years, which suggests that close to 3.0

million tonnes of zinc should arise from

old scrap each year.

In second-half 2005, primary zinc was

moving into deficit as a result of growing

demand on the world markets. However,

high-grade zinc prices have remained

virtually unchanged as buying from the

major German market has been stable and

the growth in Chinese demand has only

been slight, although it is expected to

remain steady in the medium term due to

the growth in galvanizing capacity.

We can expect to see the recycling of

LME metals grow in importance in the

near term as the secondary metal

industry strives, where possible, to make

up the shortfall in primary metal and

legislation forces ever stricter metal

recovery and recycling targets on the

metals industry.

INDUSTRY ISSUES: THE ENVIRONMENT AND SOCIETY

THERINGSIDER 102

ENVIRONMENTAL IMPACTS HAVE ALWAYS BEEN A CONSEQUENCE OF BASE METALSECTOR ACTIVITIES, AND THESE IMPACTS ARE RECOGNISED AND ARE LARGELY BEINGADDRESSED. MORE RECENTLY, AS PAUL SCOTT EXPLAINS, WIDER ISSUES – SOCIALAND ALSO ETHICAL – ARE COMING TO THE FORE


The non-financial issues being addressed

by companies in the base metals sector

are primarily environmental, together with

associated employee health and safety

issues. In this heavily industrial business

sector, the types of environmental issues

remain broadly similar across different

geographical regions and over time, and

this is reflected in the public reports

published by individual companies.

The environmental issues common to all

base metals industries arise from smelting

and refining processes and can be

characterised as: use of energy and

resources, air emissions, water discharges

and solid waste management. However,

there are a range of additional issues related

to the production of specific metals, and to

the level of environmental awareness –

often translated into compliance legislation

– in particular countries.

Taking the use of energy and resources

first; on a global scale, the sectoral

environmental issue with the greatest

impact is energy use from fossil fuels

leading to greenhouse gas emissions –

mainly carbon dioxide. In the steel

industry, for example, large volumes of

coal are used in the coking process and to

achieve the high temperatures required

by the different types of furnace. Even

where energy is taken from national

electricity grids, as in countries such as

Australia and China, this is generated

primarily from coal combustion. The

aluminium industry, while needing more

energy per tonne of metal production,

avoids much of these emissions by using

more renewable energy: much of the

industry has been deliberately sited to

take advantage of hydro-electric power,

for example in Canada, Scandinavia, and

than causing wider impacts on the scale

of greenhouse gases.

In the case of some emissions,

corporate self-interest has played a major

part in addressing the problems. Coal tars

from coke making in the steel industry, for

example, are valuable raw materials for

the chemical industry and are captured

and processed. Dust removed from

process fumes was traditionally land-filled,

but is now often compressed into

briquettes and recycled into the

production of metal.

As for solid waste management, huge

volumes of solid residues are the by-

products of metals production from ore. In

the steel industry half a tonne of slag is

produced for every tonne of liquid steel.

Millions of tonnes of slag have been land-

filled, but the combination of increased

environmental awareness and the self-

interest of finding outlets for secondary

materials has led to much of these

residues now being used as substrates in

road-building and construction, and as

raw materials in the cement industry. This

is especially the case for granulated blast

furnace slags.

Moving to secondary environmental

issues, most base metals can be recycled,

depending upon the products that have

been manufactured, and the presence of

contaminants including ‘tramp’ metals.

Some base metals – zinc, for example – are

estimated to achieve upwards of 80 per

cent recycling rates of all production.

Metal scrap is an important raw material

in most metal sectors.

In a wider context, the environmental

credentials of base metals can be

examined by means of a Life Cycle

Assessment (LCA) of all aspects of their

more recently in Iceland.

Huge volumes of water are used in the

base metals sector, both for processes

such as steam generation and for cooling

purposes. Water use on a large scale is

problematic when it is drawn from public

supply, particularly when it is of drinking

water quality. The industry response has

taken the form of increased efforts to

recycle water by re-circulation,‘cascading’

through different processes and treating

effluent before reusing it, as well as

exploiting water sources separate from

the public supply.

Greenhouse gas emissions are not

classed as industrial pollutants, but the

advent of carbon emissions trading in the

European Union, linked to allocation of

carbon emissions per industry sector, is

leading to intensified efforts to reduce

these emissions per unit of production.

While non-ferrous industries do not fall

within the first phase of EU emissions

trading, the signals have been set, and

some national voluntary emissions

agreements are already taking the new

framework into account.

The sector’s use of fossil fuels leads to a

wide range of emissions subject to

compliance limits, the most widespread

being oxides of sulphur and nitrogen

(known as SOx and NOx). Fluorides

(especially in the form of perfluorocarbons

from aluminium smelters – potent

greenhouse gases), various heavy metals

including mercury and lead, and dioxins

(especially from iron ore sintering) are

routine emissions across the sector,

although sophisticated abatement

technology continually reduces the levels

per tonne of product. Most of these

emissions affect local air quality rather

Growing focus onsustainable development

THERINGSIDER



production and use, including recycling

rates. LCA looks at the ‘cradle to grave’

impacts associated with a product or

process. The International Iron and Steel

Institute has undertaken a global study of

LCA, and several companies have

produced and published aspects of LCA.

However, the entire life cycle of a metal

includes mining, which is beyond the

remit of this brief outline.

Base metal production was a core

component in the industrial revolution and

continues to drive national economies.

sometimes employment equity issues,

such as workforce diversity including

gender and ethnicity, are reported.

Exposure to metal particulates and fumes

can give rise to a wide range of toxic

effects in all the major organs, as

recognised throughout the base metal

industry. Adequate safety equipment,

work procedures and testing, eg for

concentration of lead in blood, are the

norm in the developed world.

In addition to purely environmental

concerns, wider social issues are

Where it has been long established, site

decontamination issues are inevitable.

Many companies report on the diversity of

flora and fauna on their sites, as high

biodiversity can be an indication of good

environmental management and the

absence of serious contamination.

When base metal industries are sited in

populated areas, odour and noise can

cause significant nuisance.

In addition to these environmental

parameters, workforce health and safety

issues (accident and sickness rates), and

The environmental issues common to all base metalsindustries arise from smelting and refining processes

The base metals sector is generallyaware of its environmental impactsand is managing them



increasingly coming to the fore across the

industrial and commercial world, and the

base metals industry is no exception. The

sector is generally aware of its

environmental impacts and is managing

them, sometimes in order to comply with

legislation and often, in the case of sector

leaders, to go beyond. However, over the

past ten years business has been

expected to address its wider impacts;

those affecting the local community and

society in general. This expectation stems

from the widespread acceptance that

business has a major role in working

towards sustainable development,

together with demands by business

stakeholders to address issues of

corporate responsibility. The base metals

industry, with its central role in the

development of national economies, is

expected to follow this trend.

Trends can be seen in the way

companies report on their activities:

environmental reports have been

published widely since the early 1990s, and

are gradually being replaced by

‘sustainability’ and ‘corporate responsibility’

reports which cover a wider range of issues,

including social and ethical aspects.

Many base metal companies, especially

the multinationals, report on community

initiatives: philanthropy, development of

local infrastructures, tax contributions to

the local economy. Base metal producers

are traditionally significant local employers,

and investing in the local community is

part of a symbiotic relationship with the

social pool of the local workforce.

Increasingly, wider workforce health issues

and awareness training (for example

addressing the prevalence of HIV/Aids in

South Africa) are being addressed, from a

sense of civic responsibility as well as a

need to protect the workforce.

Most base metal companies are not yet

addressing wider social issues, unlike

companies in, say, the mining or oil and

gas sectors. This is partly because the base

metals sector has not been in the public

eye, or the subject of campaigns, to the

same extent as some other sectors. There

is also a need to look at the entire supply

chain (policies, management, training) to

ensure environmental and social

standards are adequate. In the base metals

industry this would include not only raw

materials suppliers but also transport to

and from the business.

A glance at the graph of report types

indicates that the sector is beginning to

publish a wider range of information. Over

the next five years the ‘environmental’ and

‘Environmental, Health and Safety’ report

types will dwindle to 5-10 per cent of the

total, and most large companies will report

on a range of environmental, community

and social activities.

Paul Scott is the Director of

NextStepConsulting

Types of non-financial reports produced in the ‘Steel & Other Metals’ Sector 1995-2004

100%

80%

60%

40%

20%

0%

Community

Pro

por

tion

of

Year

’s R

epor

ts

Environment and Social

(Environment/Social/Economic)

‘Corporate Responsibility’(EHS/Community/Social)

Environment, Health and Safety

Environment

1995 200120001999199819971996 20032002 2004

THE METALS MINING INDUSTRY OPERATES WITHIN STRICTER ENVIRONMENTAL ANDENERGY PARAMETERS THAN IN THE PAST AND IS CONSTANTLY SEEKING WAYS TOINCREASE OUTPUT, LOWER COSTS AND IMPROVE EFFICIENCY. IN DOING THIS, REPORTSROBIN DEVEREUX, THE INDUSTRY IS OFTEN FACED WITH THE CHOICE OF ADOPTINGNEW TECHNOLOGY OR IMPROVING UPON TRIED AND TESTED TECHNOLOGIES

INDUSTRY ISSUES: THE ROLE OF TECHNOLOGY


Energy efficiency and environmentalresponsibility driving innovation

THERINGSIDER



Technology in the production of LME

metals never stands still as mine

producers, smelters and refiners battle to

extract ever greater commercial

advantage from the processing of metals.

In addition, environmental legislation in

the developed world, and increasingly in

the developing world, is impacting on the

metals industry, forcing it to become more

environmentally responsible and energy

efficient. Base metals producers now have

to operate within strict, often self-

imposed, environmental guidelines. As a

result, the production of LME metals in the

21st century is a more technologically

advanced affair than in previous decades.

The Hall-Héroult cell has been the

technological mainstay in aluminium

smelters for over 100 years. As part of this

system the two main technologies used

to make the carbon pastes, for the

manufacture of the anodes used in the

electrolytic process, are pre-bake and

Søderberg.

The pre-bake technology is associated

with reduced air emissions and energy

efficiencies, while carbon dust is seen as a

permanent problem for most Søderberg

potlines. As a consequence, many smelters

over the years have invested in pre-bake

technology, while those smelters, notably

in Russia, that still use Søderberg are

investing heavily to ensure that they meet

today’s stricter environmental regulations.

To reduce carbon gas emissions in the

smelting process, while at the same time

cutting costs, inert anodes composed of a

nickel/iron core, have long been seen as

the key for primary aluminium producers.

Some of the world’s major aluminium

producers are already conducting trials

with inert anodes. However, this solution

has until recently been seen as a high-

cost alternative.

One solution now on the market comes

from MOLTECH, which has developed an

Inert Anode called VERONICA™. MOLTECH

leases VERONICA™ to aluminium

mine producers to consider mining

copper ores that only a few years ago

would have been technologically and

economically unfeasible.

In 1968, the first commercial application

to recover copper from solutions using

solvent extraction with electrowinning

(SX-EW) was implemented and since the

1990s its use has become widespread. As

of 2005, SX-EW is a significant proportion

of copper production in Chile and the US.

Copper from SX-EW operations has the

same commercial purity as electro-refined

copper and currently sulphide ores,

containing less than 0.5 per cent copper,

and some oxide ores containing less than

0.2 per cent copper can now be mined

using SX-EW.

Other technologies include

Outokumpu’s oxygen ‘flash’ smelting

technology, which since it was first

introduced in 1970 is reducing energy

input at copper smelters and improved air

quality by lowering smelter emissions.

The share of global copper production

represented by SX-EW copper is

continuing to grow, as the benefits of this

technology are considerable. They include:

economic copper recovery from low-

grade oxide ores and the ability to process

wastes, thereby lowering the overall cost

of copper production, particularly when

used in conjunction with conventional

processing of sulphide ores.

US copper producer Phelps Dodge

Corporation’s copper concentrate leaching

demonstration plant at Bagdad, Arizona

has been operating at design capacity

since 2003 and is the subject of interest

from copper mine producers. The plant is

the first commercial facility in the world to

use pressure leaching to treat chalcopyrite

concentrates and represents a major step

forward in copper-extraction technology.

“The new technology should make it

more economical to recover copper from

chalcopyrite ores, which account for

approximately 70 per cent of the world’s

producers, which takes much of the risk of

converting to inert anodes away from

aluminium producers. The system

eliminates greenhouse gases and the

company claims that it can save the

aluminium industry up to US$50 per

tonne of aluminium.

The Russian company RUSAL, the

second largest aluminium company in the

world after Alcoa, is undertaking a major

modernisation programme that includes

modernisation of anode production by

2006 and the upgrade of its automatic

control systems for gas purification as part

of a package of environmental measures.

Last year, following a successful trial,

RUSAL’s Novokuznetsk smelter began

implementing dry anode technology at

the smelter’s two pot rooms. Earlier

experiments with dry anode technology

were successful at RUSAL’s Bratsk and

Krasnoyarsk smelters.

“The implementation of dry anode

technology is a key element of RUSAL’s

smelter modernisation programme,

particularly because of the positive effect

on the environment,” says RUSAL’s director

of Aluminium Business, Valery Marvienko.

“During the Novokuznetsk trial, we saw a

30 per cent drop in coal dust and a

reduction of anode paste consumption.”

Emissions from the smelter are a

constant problem for plant operators and

solutions such as improved scrubber

technologies are being employed to

tackle this problem. The Abart dry

scrubbing technology developed by

ALSTOM has been on the market since

1996 and is being taken up by a number

of smelters. Meanwhile, for the removal of

SO2 downstream of the dry scrubber, wet

systems like seawater scrubbing, sodium

scrubbing and double-alkali scrubbing are

proven technologies.

Technological advances have permitted

the economic recovery of copper from

progressively lower grade and more

chemically diverse ores. This has enabled

The production of LME metals in the 21stcentury is a more technologicallyadvanced affair than in previous decades

THERINGSIDER



biochemical processes are now being

developed for the treatment of copper,

nickel and cobalt sulphide ores. These

processes are expected to become the

major method for recovery of these

metals in the future. The aim is to

eventually replace smelting processes that

generate sulphur dioxide.

The technological story behind nickel

production since the 1990s has been

that of pressure acid leaching (PAL) and

the extent to which it has succeeded or

failed to live up to expectations. Sherrit

developed the technology in the 1950s

for use in Cuba. The process involves

acid leaching at high temperatures

using sulphuric acid in a high

temperature and pressure autoclave to

dissolve the nickel and cobalt. But the

shortcomings of PAL technology

contributed to the failure of the

Australian dry laterite mines and process

plants to achieve design output in the

1990s. This fact, combined with higher

than expected PAL production costs, has

contributed to the current nickel

shortage and high cost of the metal.

known copper reserves,” says Timothy R.

Snider, president of Phelps Dodge Mining

Co. Phelps Dodge is considering

concentrate-leaching technology for

several operations and future projects,

including the development of large primary

copper deposits at the Cerro Verde mine in

Peru and the El Abra mine in Chile.

In the future, bacterial leaching could also

be developed by the copper mine industry.

Biochemical leaching is now a well-

established commercial process for

treating gold ores, in which the gold is

enclosed within sulphide minerals, and

INDUSTRY ISSUES: THE COST OF SHIPPING

THERINGSIDER 110

FOR A NUMBER OF LME METALS IN ORE CONCENTRATE FORM, THERE IS NO ALTERNATIVE TO DRY BULK CARRIAGE BY SEA, AND NOTORIOUSLY VOLATILE SHIPPING RATES ARE THEREFORE AN IMPORTANT CONTRIBUTORTO PRICE FUNDAMENTALS. PAUL BARTLETT REPORTS


Peaks and troughs of freight prices

THERINGSIDER



As ocean charter rates for dry bulk

carriers have plunged from the record

levels achieved in November 2004,

analysts are divided as to what the future

holds for the dry bulk sector. However,

there is no alternative to the large-scale

and long-haul movement of hundreds of

different bulk cargoes across the world’s

oceans. And the fact that the sources of

such commodities are often far away

from processing plants and consumers

guarantees the future movement of raw

materials by sea.

The two most important bulk cargoes

are iron ore and coal but other key

commodities include grain, bauxite,

phosphates, sulphur, cement and a broad

range of agricultural products. In addition,

heavy cargoes that comprise vital

materials in the iron and steel and non-

ferrous metal industry include high

density ore cargoes for which a

proportion of the present dry bulk fleet is

specially designed. These materials include

simultaneously for the first time ever.

Cargo owners and charterers have been

compelled to pay record daily rates and

freight costs as a proportion of the

delivered cost of manufactured goods

and commodities have soared.

However, in the dry bulk market,

owners have experienced something of a

roller coaster ride. Accustomed to

earning only modest returns from

shipping raw materials, unparalleled

demand has squeezed the supply of

tonnage and bulk carrier owners have

seen their earnings multiply by factors of

up to five or ten. As a result the average

spot earnings of a modern Capesize

vessel rose from around $40,000 a day in

2003 to well over $70,000 in 2004 with

some lucky owners fixing at daily rates of

more than $100,000.

All previous records have been broken

as a result of soaring Chinese demand for

raw materials. And despite attempts to

slow the economy there, analysts reckon

copper, lead and zinc concentrates for

which there is no transport alternative and

without which the world’s economy

would be jeopardised.

The cost of freight in the dry bulk

market, however, is largely determined by

the demand/supply balance for large

vessels on long-haul voyages carrying

the principal bulk commodities used in

steel production. Typically such ships are

Panamax vessels, with maximum beam

limited to 32.24m to pass through the

Panama Canal, or Capesize ships which

are too large to sail via Suez and are

therefore routed around the Cape. The

fortunes of smaller bulk carriers focusing

on ore concentrates are largely

determined as a result of the relative

supply balance in the large bulker sector.

For most ship owners, the last 12

months have been truly remarkable, with

all of the major shipping sectors –

containers, liquid bulk and dry bulk –

experiencing unprecedented demand

The last 12 months have been trulyremarkable, with all of the major shippingsectors experiencing unprecedenteddemand simultaneously for the first time ever



it is still growing at an annual rate of

more than 8 per cent. Now, Indian

demand is also contributing to shipping’s

fortunes and trade expansion elsewhere

in Asia and South America is also helping

to underpin the bulk market.

The ups and downs of the market are

perhaps best illustrated by the Baltic

Exchange Dry Index. This measure

combines a number of indices reflecting

the rates paid for certain types of bulk

tonnage on various routes and

employment contracts. The indices are

compiled from data submitted by more

than 20 ship brokers who regularly

estimate the time and voyage charter

rates for 24 key bulk cargoes on leading

shipping routes.

Shipping markets are notoriously

volatile and analysts have various

explanations for the scale and speed of

the market’s dramatic retreat early in

2005. Market sentiment played a

significant role, many believe, with

analysts warning of possible economic

overheating in China, rapidly rising energy

prices and climbing interest rates. But the

scale of the market’s decline still took

everyone by surprise.

While there are promising signs that

further strengthening is likely, few expect

a repeat of 2004’s records, mainly

because of mounting concern over the

size of the order-book. Ship owners have

been beating a path to Far Eastern

builders for many months and new ship

prices have spiralled as a result. Bulk

carriers are no exception.

According to Clarkson Research, a

division of the leading London ship

broker, there were 882 bulk carriers on

order as of 1 June 2005, totalling just over

70m dwt and representing more than a

fifth of the existing fleet. About 250 of

them are large Capesize units used

primarily in the carriage of iron ore and

coal. However, all 882 vessels are

scheduled for delivery between now and

the end of 2008, a huge volume for the

market to absorb.

Of course, there will be some natural

wastage as ageing bulk carriers are sold

for demolition during this period. But an

influx of tonnage on this scale has never

been seen before and there are some

who believe the dry bulk market could

become a bloodbath as a result. Charter

rates, they suggest, could go into freefall

as ship owners fight to fix ships for the

relatively few available spot cargoes. This,

some believe, could become a crisis if the

global economy is hit by further

substantial hikes in oil costs.

Others are more confident, however.

They point out that the scale of economic

expansion in China and India is such that

it cannot stop overnight. Even if a

worsening economic environment knocks

a couple of points off growth rates,

economic expansion will still remain

firmly positive. And dry bulk carriers and

the commodities they carry fulfil a vital

role in so many aspects of the world’s

fundamental economic activity.

THERINGSIDER

COPPER MARKET ISSUES


COPPER PRICES HAVE JERKILY CONTINUED THEIR ASCENT IN RECENT WEEKS, ANDTHE RECORD HIGHS ARE CONFOUNDING FORECASTS. WITH THE MARKET CAUTIOUSLYWAITING FOR THE CYCLE TO TURN AND PRICES TO FALL, RUMOURS ARE RIFE. JIM BANKS TALKS TO MARKET COMMENTATORS ABOUT THE UNIQUE SET OFFUNDAMENTALS CURRENTLY IN PLAY

Copper’s current high price is supported

by short-term factors, among them

additional buying by funds, stronger

demand for consumer durables from the

US and the risk of strike action at

Falconbridge, amongst other sources.

Looking longer-term, the split between

the bulls and the bears grows wider as

rising prices encourage some to believe in

an emerging super-cycle in copper that

will sustain prices, while others believe

Hollands of Bloomsbury Minerals

Economics in a recent presentation on the

copper market.“I suspect that the peak is

behind us and that prices will fall.”

Hollands is not alone in expecting

prices to fall, but the question to which no

one has yet found the answer is when this

will happen. For those buying the three-

month and selling the cash contract in the

current climate of backwardation, timing

is everything and being caught behind

they are bringing the market close to

tipping point.

High prices certainly seem to be making

demand more price-elastic, with rises

putting off some demand and encouraging

substitution of copper where possible.

“Faced with the level of risk that a small

change in consumption can bring, there

are either very bull or very bear scenarios

for 2006. We cannot know within a huge

margin where prices will be,” said Peter

The copper conundrum

THERINGSIDER


117

Though at their highest level this year, LMEstocks are still historically low, and theexchange rate cycle is buoying the market


the price flip would be costly.

High prices have encouraged new

production, albeit with a long time-lag

before new capacity can come online.

Bottlenecks along the chain of refining

copper from raw material have constricted

supply, but the accepted view is that next

year the market will see a growing surplus

of copper from increased production.

Views on the size of this surplus differ

greatly, but generally the feeling is that

rising supply and dampened demand

constitute the current trends, leading

some to question why prices have not

started to fall.

added demand for base metals. In the

Goldman Sachs Commodity Index, for

example, energy products have a dollar

weighting of 80 per cent – crude oil

accounting for almost 28 per cent – while

industrial metals, comprising aluminium,

copper, lead, nickel and zinc, have a 5.5

per cent dollar weighting.

Along with these known supports, the

effects of China’s activity, on both the

demand and supply sides, remain hard to

quantify. Some demand dips in the past

have been due to China de-stocking,

using reserves of material to meet

domestic demand, though some analysts

There are signs that the market is

entering an unprecedented phase, hence

the talk of super-cycles in copper prices.

This new and unique phase is

characterised by a number of factors that

act to support prices, along with greater

unknowns, principally China’s behaviour,

that have left everyone guessing when

the market will turn.

Though at their highest level this year,

LME stocks are still historically low, and

the exchange rate cycle is buoying the

market. Furthermore, the ongoing

interest in commodity indices, largely for

exposure to rising oil prices, also brings



Mike Skinner at Standard Bank.“Everyone

is expecting a huge fall in copper, but it

might not happen right now, if the funds

stay interested.”

At present, there is no concrete

evidence that rumours about speculative

manipulation of the copper market have

any basis in fact. For the LME, nothing has

changed and it continues to operate a

robust market, with specific mechanisms

already in place to address any attempt to

dominate the market. It has lit no warning

beacons and feels confident that it

provides the best market for the trading of

industrial metals.

Anticipating the tipping point, some

elements in the market seem to have

tied recent trading to total LME stock

levels. The detail contained in the

exchange’s daily stock statistics enable

market participants to understand the

daily changes in the stock reports. For

example, the net amount of metal

delivered in or out each day can be

better understood by examining the

levels of cancelled metal in each

location. Comparing the daily stock

reports, over time, allows market

participants to better understand the

pattern of stock movements.

Using this data correctly may smooth

out some of the jerkiness in prices, but the

market faces a clear choice between

panicking and holding its nerve.

At present, there is no concrete evidencethat rumours about speculative manipulationof the copper market have any basis in fact

active in base metals, but those that short

the market are relatively few.

“There is a lot more investment money

in the cycle than in the past – much, much

more but a lot of it is long-only,” Briggs

adds.“Macro hedge funds do go short, but

portfolio diversification and index

investors only go long. You don’t diversify

by shorting. I make a clear distinction

between diversifying investors and

traditional hedge fund activity on one

hand, and market distortion, which is

something else entirely.”

Other sources note that keeping metal

off-warrant is an expensive way to try to

make money. Furthermore, the LME has

introduced a new process for controlling

dominant positions since Sumitomo’s $2.6

billion losses led to Hamanaka’s arrest in

1996. Depending on the proportion under

any one entity’s control, dominant position

holders must be prepared to lend material

back to the market at no more than a

backwardation premium set by the LME

Lending Guidance.

Rumours about speculative manipulation

of the market, though never entirely

absent, have grown louder of late. However,

the current twitchiness is more likely due to

the combination of unknowns.

“There are always rumours that China

has copper, and then there are always

conspiracy theorists, but people don’t

know. No one knows, and that is showing

in nervousness and a thin market,” says

do not expect more in the near future. In

fact, restocking is felt to be more likely.

“We conclude that there is not a lot of

spare material around. Though there

may be some in China, it needs a larger

buffer to support its development,” says

Ingrid Sternby, base metals analyst at

Barclays Capital.

Twitchy movements in the copper price,

on relatively thin trading, along with the

questions in some quarters about why the

price has not fallen despite growing

supply, have created an atmosphere ripe

for rumours. Some, possibly fuelled by the

release on parole of Yasuo Hamanaka, the

former copper dealer who squeezed the

market in the late 1990s, centre on the

possible release of an off-warrant stock of

copper by a speculative fund looking to

benefit from a short position in the

ensuing price fall.

“In the last three months there has

been much talk, with rumours about

people who could loosely be described

as hedge funds, but it is unproven and no

one is saying who it might be,” says

Stephen Briggs, metals analyst at Société

Générale Corporate and Investment Bank.

“There is talk about metal being held

away from the market. LME stocks are

rising, so is this the material people are

talking about? Few people know, and

with the data available … we are pretty

much in the dark.”

Funds have no doubt become more

MARKET ISSUES: EU REGULATION

THERINGSIDER 120

REGULATION IS ALWAYS A MOVING TARGET AS AUTHORITIES TRY TO IMPROVE THE SECURITY AND EFFICIENCY OF FINANCIAL AND COMMODITY MARKETS. WITH MANY EUROPEAN UNION DIRECTIVES COMING INTO FORCE, FIRMS MUST STAY INFORMED IN ORDER TO MAKE THE MOST OF THE OPPORTUNITIES THE NEW LEGISLATION WILL OPEN UP. JIM BANKS REPORTS


EU Regulation – the road ahead

The creation of a single market for

financial services across Europe will

require commodity traders and other

financial institutions to make changes to

the way they do business. As European

Union (EU) member states implement

new European Commission (EC)

Directives governing market operation,

the priority for LME members will be to

keep abreast of how the incoming

regulations evolve.

While the market has been aware for

some time that change is coming, the

specific steps towards change that will be

required by individual Directives remain

the subject of debate. As definitions and

guidelines for implementation become

clearer, firms trading on the LME would do

well to be as closely involved as possible

with the regulatory process.

Furthermore, this should apply not only

in the run up to the introduction of new

legislation, but also in the crucial early

stages of its application.

EU Regulation FactboxOver the last five to six years, the EU has adopted 38 out of 42 FSAP measures requiring implementation in Member States. In the UK, executing

this process falls mainly to HM Treasury and the Financial Services Authority. The regulated markets, authorised persons and market

users/investors obtain the benefits and/or feel the burden of the FSAP.

The EU process

Initially, the Commission consults interested parties before making a formal proposal for a directive. This ‘Level 1’ process concludes once the

European Parliament and the Council of Ministers agree framework principles and implementing powers. The directive comes into force once

published in the Official Journal of the European Union, with Member States having a period defined in the directive to implement it by

introducing or amending domestic legislation, rules and regulations.

On, or perhaps before, completion of the Level 1 process, the Commission requests advice from the Commission of European Securities

Regulators (‘CESR’) on technical implementing measures arising from a directive. After consultation, CESR provides the advice to the

Commission, which considers this when making its proposals to the European Securities Committee (ESC). The ESC is a committee of high-

ranking officials – State Secretaries in the Finance Ministries of the Member States or their personal representatives – consulted by the

Commission on policy issues pertaining to the Internal Market in Financial Services. The Commissioner responsible for that area chairs the ESC.

MiFID is at the stage where CESR is consulting on proposed advice to the Commission.

If accepted by the ESC, the European Parliament has a short period to consider whether the proposed measures comply with the implementing

powers defined in Level 1. Subject to nothing arising, the Commission then adopts the proposals. This completes the ‘Level 2’ process.

Under the next level, ‘Level 3’, each Member State must ensure that it implements the provisions of a directive by the date stated in Level 1.

Level 4 is where the Commission ensures that Member States accurately transpose directives into domestic legislation.

THERINGSIDER



Now in place, the revised Market Abuse

Directive (MAD) replaces existing safe

harbour conditions for trading

information with a more complex

analysis, but it is not a major change from

the Financial Services Authority’s (FSA)

existing rules.

“By and large, MAD is fairly similar to

the current UK approach to market

abuse, although it introduces insider

dealing on commodity derivatives,” notes

an LME spokesperson.

The changes that the Directive does

usher in, however, are still subject to

clarification, particularly in regard to the

process of reporting suspicious

transactions. Wisely, there is some

flexibility at present in the interpretation

of the FSA’s guidelines, so that

experience can dictate the circumstances

that merit a report to the regulators.

“The obligation to report suspicious

transactions has been cast fairly wide

within the FSA rules – it's an objective,

"ought reasonably to have suspected",

rather than a subjective, "actually

suspected" test. However, in separate

statements, the FSA has said that it will

come down hard on those who over-

report and has told firms that they do

need to install systems to detect

suspicious trades,” says Simmons &

Simmons' Darren Fox.

The FSA has said that it expects only

around 200 reports per year, so careful

judgement is required initially.

The revised MAD replaces existing safeharbour conditions for trading informationwith a more complex analysis

Learning from MAD

THERINGSIDER



the UK market, including for example,

through systems changes and IT

upgrades. Industry is understandably

concerned about the potential scale of

these costs – and I share those worries. It

is far from clear that the benefits to the

UK will outweigh the costs,” said the FSA’s

Callum McCarthy recently.

Regarding the exemptions, those

providing investment services exclusively

for group undertakings are to be

excluded from MiFID. The same applies

for those entities dealing on their own

account, or providing commodity

derivatives services as an ancillary activity

to the main business, provided that is not

investment or banking. What is less clear

for now is whether or not some exchange

members will be exempt from MiFID, due

to the main business of their group being

other than banking or financial services.

“It is not yet clear which metals players

are included under the definition of an

investment firm. Most LME members

should, on the face of it, be included but

there are exemptions. There remains

some uncertainty about the scope of

these exemptions and these will

hopefully be ironed out when the FSA

publishes its MiFID implementation rules

and guidance,” continues Fox.

Players in the market should now be

focused on the proposed legislation, rules

and regulations to implement MiFID that

the Treasury and the FSA will publish in

November, and which should provide the

latest insight into the definitions of

exemptions to guide firms along the road

to compliance.

“As with any measure, there will be

threats and opportunities. Much will

depend on how the UK implements the

directive and if it decides to be super-

equivalent or not. Individual members

could be placed at a disadvantage if

exempted from MiFID. However, it

potentially provides great opportunities

by making developing business in the EU

easier. It will require the reporting of

transactions in base metal derivatives to

the FSA, whether via the LME or direct is

not yet known, but it is likely to involve

costs irrespective of the channel

chosen,” says an LME spokesperson.

MiFID: the level playing fieldWith MAD now in, more attention is being

given to the implications of the Markets in

Financial Instruments Directive (MiFID),

which is set to replace the 1993

Investment Services Directive (ISD).

The changes heralded by MiFID could

be significant for LME members. The ISD,

which established a pan-European

framework for banks and investment

houses to provide services in all EU

member states under domestic licences,

does not cover commodity derivatives

such as metal and plastic futures and

options traded on the LME. However,

MiFID extended the definition of financial

instruments to include commodity

derivatives, thereby bringing them under

the same regulatory umbrella as financial

instruments such as securities and

financial derivatives.

Many types of commodity derivatives

are covered, including cash-settled

contracts and trades on EU regulated

markets or multilateral trading facilities

that can be physically settled. MiFID also

applies to other physically-settled

commodities not being used for

commercial purposes that have the

characteristics of other derivative

financial instruments. Exactly what this

means is under consideration at Level 2.

The costs and benefits of MiFID for

commodity market players will again

depend on the specific definition of

exemptions to the Directive, which will

determine which firms benefit from

MiFID’s European ‘passport’. It should be

noted however, that the FSA has indicated

a desire to harmonise its Prudential

Resources requirements, meaning that

exempt authorised firms, that is those

outside the scope of MiFID, could still face

being subjected to the same regulatory

capital requirements as firms benefiting

from being subject to MiFID.

“On the plus side, those undertaking

activities in relation to commodity

derivatives that are within MiFID will be

able to obtain a licence in one member

state and passport their activities into

another member state via a branch,” says

Jonathan Marsh, Partner at law firm

Hunton & Williams.

“On the negative side, entities whose

current European activities do not require

them to be regulated may find that the

position has changed and they need to

obtain a licence and adhere to a

prescribed regulatory regime. Of

particular concern is the fact that those

whose activities are caught by MiFID

could be subjected to a stricter capital

adequacy regime; which could lead to a

significant increase in the cost of doing

business, the need to increase regulatory

capital substantially, and a lower return

on capital employed,” Marsh continues.

The final draft of the Capital

Requirements Directive (CRD), published

in mid-October, raises further questions

for LME members. It states that entities

trading exclusively commodity derivatives

will not be subject to the CRD until at

least 2010, so firms need to examine their

activities closely to see if they fall within

this exclusion. Similarly, firms not subject

to MiFID will not come under the CRD

until 2010, so much will depend on how

the FSA and the Treasury apply MiFID and

whether they do decide to adopt a

harmonised rulebook.

Furthermore, given that the deadline

for implementation of MiFID has been

put back to 2007, there is a time lag

between the application of the CRD in

2006 and the clarification of whom it will

apply to when MiFID is finalised.

Overall, the likelihood is that brokerage

houses will face steeper increases in

capital requirements than banks, which

could in many cases benefit from lower

capital requirements. The LME

membership comprises banks and non-

banks – hence, this is a substantial

competition issue.

The potential costs of compliance

cannot be ignored. Financial services

consultancy, Celent, estimates MiFID

systems will cost the financial industry

over E1 billion, some 37 per cent of

which will be spent on internal order

management systems. Many

investment firms and financial services

associations have voiced concern over

such issues, and UK regulators are

aware of the cost issue.

“It is already clear that the MiFID

changes will impose significant costs on

THERINGSIDER



So what next? LME members engaged in

the physical trade in metals and who are

likely to be subject to REACH

registration requirements should

consider contacting the relevant metal

associations in order to access the data

required through consortia when they

are formed. Such access is likely to carry

a cost, given the investment made by

the associations and the metals

industries they represent, in gathering

the relevant information.

Joining the appropriate consortium is

likely to be voluntary, and it will remain

open for an entity needing to register a

substance to generate its own data and

to register on its own. It is inevitable that

some entities, for example LME traders

engaged in opportunistic or ad hoc

trade, will need to register substances

some time after the REACH

requirements come into force. At which

point they would have the option of

generating the relevant data

themselves, or gaining access to an

existing consortium.

The LME is following the progress of

REACH closely and supporting the

tabling of various amendments to

achieve the best outcome for the LME

market and the wider metals community.

What is increasingly clear is that others in

the industry who are likely to be affected

by the legislation in its current form

need to engage in the debate and

ensure they fully understand the

implications, and their options, long

before Spring 2007 comes around.

For further information on REACH:

• www.lme.com

• Contact the LME by email:

[email protected]

Metals industry associations:

• www.coppercouncil.org

• www.nickelinstitute.org

• www.ilzsg.org

• www.leadtin.com

• www.eaa.net

Debate over the EU REACH policy has

entered a particularly decisive stage. The

draft Regulation began its Parliamentary

phase on 21 January 2005; MEPs are

scheduled to vote on the amended text at

the end November 2005 and send the

amended policy back to the European

Commission prior to a second reading in

Parliament. Industry, via MEPs, tabled over

3000 amendments in May and June 2005

to the three committees steering the

legislation through the European

Parliament. If there are no delays to the

schedule, REACH could become law by

Spring 2007.

REACH requires each chemical

substance produced or imported (in

volumes over 1 tonne) to be registered by

each of the producers of the substance

within the EU and each of the importers of

the substance into the EU.

Currently this impacts all LME traded

metals, and therefore anyone 'importing'

metal into the EU. Plastics, futures

contracts for which launched at the LME

in May 2005, are at present excluded from

the REACH legislation, but this Is likely to

be reviewed at a later stage.

For LME metals, according to terms of

particular trades, the 'importer' into the EU

may be, for example:

• A customer in the EU of a non-EU

producer.

• A producer or trader outside the EU.

• A trader or producer importing metal

on his own account.

• A user taking up metal on an LME

warrant and importing that into the EU.

All LME warehouses are in fiscal

regimes outside the EU customs area. As

such, metal shipped into and stored

within LME warehouses is not directly

affected by REACH. However, REACH

comes into effect if metal is imported

into the EU following cancellation of a

warrant and withdrawal from LME

warehouse. For metal that has been

stored in LME warehouses it is the fiscal

importer who will be responsible for

registering under REACH the material he

wishes to import into the EU.

Once a producer or importer has

registered that substance under REACH,

then he may continue to produce or

import that particular substance without

further registration. Thus, once an

importer has registered, for example,

copper of LME Grade A quality, he would

be able to import any brand of LME

Grade A copper, the compositional

integrity of all brands being sufficiently

similar to fall under the description of

copper as the registered substance.

However, this would only apply to

copper and the registration process

would have to be repeated for all other

LME metals.

Although registration will be

substance-generic, it will be registrant-

specific. For example, if the EU producer

of an LME brand of metal has registered

that substance and then placed the

metal in a LME warehouse, anyone taking

up that metal and importing it back into

the EU would still have to register that

substance as an importer.

A possible model for registration will

be the formation of consortia for each

substance, consisting of those obliged to

register a given substance, for example

EU producers, EU importers (as listed

above), non-EU producers (where

relevant) and traders. Together, these

interests would produce a joint dossier

on a particular substance for registration

with the European Chemicals Agency. All

participants in the consortium would be

identified as registrants of that particular

substance and would then be able to

produce that substance in the EU and/or

import it into the EU.

For LME traded metals it would be

important for substances as defined in

the relevant LME contract specifications

to be included in such registrations.

For some metals, industry associations

have already carried out significant pre-

registration work, eg in zinc and copper,

and these could form the basis of

registration consortia.

Within REACH?

If there are no delays to the schedule,REACH could become law by Spring 2007

THERINGSIDER

MARKET ISSUES: CAPITAL ADEQUACY


REGULATED MARKETS ARE NOW AN ACCEPTED PART OF THE FINANCIAL WORLD, WHERETHE PROCESS OF ADJUSTMENT TO ANY NEW ENVIRONMENT NATURALLY INVOLVESSIGNIFICANT EFFORT AND INVESTMENT. JIM BANKS REPORTS THAT THIS IS CERTAINLYTHE CASE WITH THE NEW BASEL II ACCORD, AS THE ENORMOUS SCOPE OF ITSREQUIREMENTS HAS LEFT MANY COMMODITY TRADERS IN NEED OF MORE ANSWERS

Amidst the many legislative changes in

the pipeline for the financial services

industry, the Basel Committee on

Banking Supervision’s new framework

for banking organisations’ capital

adequacy requirements is perhaps the

most significant.

In furthering the original 1988 Accord,

the Basel Committee has recommended

measures that add complexity to

international capital regulations, but which

also aim to provide greater consistency,

make capital more risk-sensitive and

promote enhanced risk management, with

the ultimate goal of making the financial

No pain…

Monitoring and management of exposures have significantly changed and regulation is catching up

market more robust and secure.

The 1988 Basel Accord – supplemented

in 1996 by requirements for exposures to

market risk – was the first internationally

accepted definition, and minimum

measure, of capital. It subjects banks’

exposure to the same kinds of borrower

to the same capital requirement,

regardless of potential differences in the

creditworthiness and risk posed by

individual borrowers.

Now, the International Convergence of

Capital Measurement and Capital

Standards: a Revised Framework – known

as Basel II – brings together the many

advances in risk management practices

and technology that have taken place

since 1988, an important effect of which is

to highlight the importance of

distinguishing between the relative credit-

worthiness of individual borrowers.

Monitoring and management of

exposures have significantly changed and

regulation is catching up.

The implementation of Basel II

requires potential change, in that firms

have to examine the risk models and

capital constraints that must be applied

to their businesses.

Eager to comply with the new



regulations, firms are keen to know how

the Accord will apply to their business. A

principal source of frustration has been the

lack of clarity over definitions, and a need

to know if entities that are not large banks

also fall under the jurisdiction of Basel II.

The publication, in October 2005, of the

final draft of the Capital Requirements

Directive (CRD) – the EU implementation

of Basel II – went some way to clarifying

the situation. The document made clear

that firms exclusively trading commodity

derivatives as their main business will not

be subject to the CRD until at least 2010.

LME member firms will, therefore, have to

be clear about the extent of their activities

in order to target compliance.

The 2010 deadline is similar to that set

for firms not included in the forthcoming

Markets in Financial Instruments Directive

(MiFID), which will come into force in 2007.

In November 2005, there will be further

clarification from the Financial Services

Authority (FSA) regarding its

implementation of MiFID. Though the FSA

has already given some indication of its

intent, firms can still not be sure how this

Directive will affect them.

Furthermore, the CRD has now been

published, coming into effect next year,

while the deadline for MiFID has been

extended to 2007, leaving a gap in which

the application of the CRD will be

debatable, given that exemptions under

MiFID will only be implemented later.

It seems entirely possible that among

the LME membership, some firms will be

subject to MiFID, others not, and a similar

situation will exist in regard to the CRD.

THERINGSIDER


129

“The intention of Basel II is torebalance capital so that risksare measured more precisely”


traders were not initially recognised as

such under the CRD, though it now

appears they can be used against on-

exchange exposure.

Another concern is that non-banking

firms must deduct liquid assets from their

capital assessment.

“Commodity players’ balance sheets

look very different to the balance sheet of

your average bank,” Fox points out.“Often

commodity players, or their consolidated

groups, have big fixed assets on their

balance sheet. The CRD regime is liquidity-

based and requires these so-called

‘illiquid’ assets to be deducted from the

capital calculation. The upshot is that a

large well-capitalised firm, with hundreds

of millions of dollars of share capital and

reserves, could find that it has little, or

even no, capital for regulatory purposes.”

Furthermore, additional capital

requirements for trading in ‘complex

financial instruments’ extend to derivatives,

though firms accustomed to the derivatives

markets may not see exchange-listed

contracts as complex, but instead as simple,

safe tools for risk management.

“To be effective, the EU’s regulatory

capital regime must differentiate between

the types of players in the market. The

investment bank model does not fit

smaller commodity brokers,” Fox says.

For those commodity traders that are

aligned with banking entities, the

approach to Basel II, however, is relatively

straightforward even before the situation

becomes clearer in November.

“We won’t know the final impact from

the capital point of view until we have

received the final spec from the FSA on

how to implement it,” says Edward

Sawbridge, finance director of Natexis

Commodity Markets Limited, which as

part of a major French banking group

does not expect the new regime to have a

fundamental impact on its business.

“Our capital base is entirely adequate,”

continues Sawbridge.“Should a

requirement arise necessitating an

increase it would be achieved either by

way of an uplift in the authorised and

issued capital or subordinated debt from

our parent company. There’s nothing on

the horizon with Basel II that will cause

us to cut our cloth differently.” He

recognises, however, that some LME

members have a smaller pool of capital,

and that for them the change involved

will be much greater.

To some extent, the CRD’s effect will

depend on how firms approach the

modelling of risk.

“A lot of Basel is about taking a highly

sophisticated approach,” explains

Sawbridge.“The regulators will judge

operational risk models against those

applicable for, say, HSBC or another big

banking organisation. We will measure up

to the appropriate model but this may be

a less sophisticated version as our

spectrum of activities, as a stand alone

operation, is not as broad.”

For many entities, a simplified approach

will still be more appropriate.

Sawbridge does not believe it is likely

that the savings that might be made using

more sophisticated models will prove

worth it, compared to the lower cost of

using a simplified version.“The intention of

Basel II is to rebalance capital so that risks

are measured more precisely,” he says.“It is

not meant to change enormously capital

requirements one way or the other. For

corporates – and many of the firms trading

on the LME are corporates – things will not

be that different pre- and post-Basel II.”

In the short term the market’s

attention may be focused on the pain of

transition to the new capital regime. But

when more detailed planning becomes

possible after the announcements in

November, attention may turn to the

long-term benefits.

Those firms that are included under

MiFID will be subject to the CRD, and

MiFID requires organisations to have

suitable capital requirements for

complex financial instruments.

“Although some of the conduct of

business aspects of MiFID are likely to cause

difficulties for commodities firms, MiFID in

itself is not the major headache,”says

Darren Fox, a partner at law firm Simmons &

Simmons.“The big problem results from the

impact on commodities firms that falling

within MiFID will have on their regulatory

capital requirements under the Capital

Requirements Directive.These capital

requirements have been formulated with

commercial banks and investment banks in

mind and are often not suited for

application to commodities houses.”

The technical challenge that Basel II

poses, centres on the definition of

‘adequate’ capital: too little provides an

insufficient buffer for losses, while too

much prevents organisations from

optimising resources. Basel II details ways

to adopt more risk-sensitive approaches to

capital requirements, but for commodity

traders these may not necessarily be the

best choice.

Jaime Caruana, who chairs the Basel

Committee, believes that Basel II

represents an ‘unparalleled opportunity to

improve [firms’] risk measurement and

management systems’. This can certainly

prove true for LME members, provided

they can sustain the cost of implementing

the Accord, and make an appropriate

choice of risk model.

“If members are to optimise use of

capital under CRD they will need to assess

and introduce models and/or techniques

aimed at reducing capital committed to the

businesses,” says an LME spokesperson.

Hitherto, there have been fears that

some commodity market activity would

not fit neatly into the CRD. For instance,

warrants often used as collateral by metals

THERINGSIDER

MARKET ISSUES: THE ROLE OF THE FUNDS


LIQUIDITY IS THE KEY TO MOST SUCCESSFUL COMMODITY MARKETS. IN BASE METALS,FUNDS INCREASINGLY PROVIDE SOME OF THIS LIQUIDITY, BUT, AS JIM BANKS REPORTS ITIS QUESTIONED THAT THIS IS AT THE COST OF PRICE STABILITY. IS THIS CONCERN VALID?

The impression that speculative activity

can distort prices is a view that has been

widely touted for many markets in the

past, but in the final analysis, does this

theory hold true in base metals?

“The concern is that funds somehow

alter price away from its fundamental

value – moving them from where they

‘should’ be. Funds do account for an

There can be no doubt that turnover in

the world’s base metals markets is

increasingly accounted for by the trading

activity of investment funds. To some who

have traditionally hedged on the London

Metal Exchange, this may seem alarming,

as it suggests the markets are no longer

primarily there to serve the underlying,

physical market players.

Friend or foe?



increasing amount of turnover on the

LME,” says Jim Lennon, senior metals

researcher for Macquarie Bank.

Despite their growing involvement in

base metals, however, the perceived

influence of funds may often have been

overestimated.

“Funds are a factor, but the real drivers

of metals prices are always the

fundamentals,” says Lennon.“[The funds]

are a convenient scapegoat for

fluctuations in price, but the strength of

China, supply disruption and tightness in

the market are more important factors.”

This is a view widely held by other

analysts.

“There is no cause for concern,”says

Robin Bhar, base metals analyst for Standard

Bank.“Funds are the risk-takers. Risk-averse

players need the other side. Funds fulfil this

role well and provide liquidity for

thousands of exchange users.Their activity

helps make price discovery as effective as it

can be.”

To understand how they may affect

base metals markets, it is necessary to

distinguish between the different types

of funds.

Hedge funds, though they take

relatively large positions, which they hold

THERINGSIDER


133

“The effect of fund activity on pricesis growing, but this is a good thing.Funds add liquidity to the market”


positions that do not have the weight to

dramatically change prices.

“When [funds] sell or buy, it can have an

exaggerated effect on price and this has

been seen in the ten years since funds

began trading on the LME,” notes

Standard Bank’s Bhar.“A drop of 10-15 per

cent in the price in two days draws the

attention of traditional exchange users, as

in the very short term it is not the

fundamentals driving prices, it is sheer

weight of money.”

However, such blips are the exception

rather than the norm.

“When there is a sudden influx of

buying, or a period of heavy selling, this

can be a factor in short-term price change,

but over time, we believe that the effect of

speculative activity on prices is minimal,”

says MacQuarie Bank’s Lennon.

The significant effect of fund activity is

not, then, price distortion. In fact, there are

those who believe prices have actually

been more aligned with ‘fair value’ in the

presence of greater speculative activity.

“One could argue that prices have been

more stable than they would otherwise

have been because of the added liquidity

funds provide, which may result in less

volatility over time,” says Barclays Capital’s

Sternby.“The effect of fund activity on

prices is growing, but this is a good thing.

Funds add liquidity to the market.”

It is in this increased liquidity that

fund activity is seen to provide a major

boon to traditional exchange users. If

funds do drive prices out of line with

different entities’ estimations of fair

value, hedging can be most effective. If

producers feel prices are too high, they

can lock in that price or sell forward. A

consumer, seeing the market price as

below fair value, can also take advantage

and secure a lower price.

Lennon agrees.“If you are a producer

or a consumer hedging the forward price

curve, the funds are your counterparties.”

The sharp price drops that have

caused concern in copper, for example,

could also be seen as funds bringing

prices in overheated markets back

towards fair value.

“So the market can benefit from fund

participation. Besides, funds won’t pull

prices above or below fair value for long,

as the fundamental demand and supply

conditions will win out in the end. The

fundamentals always rule long-term,”

says Lennon.

Fund activity in the base metals

market may well increase further, as they

become more interested in and familiar

with commodity markets, and this could

be advantageous to the LME’s

traditional users.

over extended periods, are not necessarily

the main drivers of fund activity. While

they act on their analysis of the

fundamentals of the market, the opposite

is true for CTA (Commodity Trading

Advisers) funds, which have much shorter

time horizons and trade on technical

chart signals from blackbox systems.

Macro funds, which follow the US dollar

and express a macro-view on metals prices

in their market positions, are also active, as

are, increasingly, entities such as pension

funds. While these have traditionally

tracked equity markets, more are now

seeking exposure to commodities through

index tools such as the Goldman Sachs

Commodity Index (GSCI).

These indices will often be heavily

geared towards energy markets, but also

carry a significant element of base metals.

“It is important to distinguish these

four categories,” confirms Ingrid Sternby,

base metals analyst for Barclays Capital.

“All are active in the market in varying

degrees, but now pension funds are the

most active, looking for long exposure.

CTA funds are active, too, as are macro

funds playing from the short side. Hedge

funds are showing more interest as

leading economic indicators pick up.”

The balance of funds clearly play an

important role, bringing liquidity to the

market and thus improving the

credibility of the LME price. Hedge funds,

too, buy and sell similarly large positions,

which can impact price over the short

term, but both hedge funds and index

investors are only active in the market

relatively infrequently, trading as part of

long-term strategies.

CTA funds, which are constantly

involved in the market, take smaller

THERINGSIDER

MARKET ISSUES: INDICES AND STRUCTURED PRODUCTS


INSTITUTIONAL INVESTORS NEVER DO ANYTHING IN A HURRY, SO THEY ARE NOT EXACTLY POURING INTO THE COMMODITIES MARKET. YET SLOWLY, GINGERLY, INCREASING NUMBERS ARE ALLOCATING PORTFOLIO SPACE TOCOMMODITIES. AND, AS EDWARD RUSSELL-WALLING REPORTS, THE MARKET ISRESPONDING WITH SOME INGENIOUS PRODUCTS TO ENCOURAGE THEM FURTHER

Until relatively recently, long-only

investors like pension funds, investment

funds and insurance companies tended to

stay well clear of commodities. If asked

why, they would have said that, as an asset

class, it didn’t fit their risk profile. In truth,

they simply didn’t understand the market

and, since they felt perfectly well served

by more traditional asset classes, they

weren’t going to waste time trying to.

But their traditional markets have

changed. After the last equity bust, pension

funds in particular woke up to a world in

which the easy returns they had become

accustomed to were, apparently, no longer

available. And the ensuing scramble into

the bond market then forced bond yields

to unappetisingly low levels.

So pension funds and other

institutional investors, together with their

advisers, have been on the prowl for

alternatives to equities and bonds, not as

replacements but as supplements that will

boost overall returns.

Property, private equity and hedge

funds of one kind or another have all been

pursued with this aim in mind. Now it is

the turn of commodities. Institutions are

realising that, like other alternative

investments, commodities offer useful

diversification benefits through non-

correlation. They can also provide equity-

like returns, though the investment can

now be structured to behave like fixed

income, and they can offer the option of a

hedge against inflation.

Once they had begun to appreciate

these benefits, the first institutional toe in

the water was via investment in

commodity indices. The money tracking

Commodities as a newinstitutional asset class



these indices has leapt from around $15

billion in mid-2003 to around $50 billion

in mid-2005, according to Stefan Weiser,

Goldman Sachs’ Singapore-based head of

Asian commodity sales. He estimates that

about $40 billion of that comes from

pension funds. This may be a drop in the

ocean compared to the trillions of dollars

that wash through commodities markets,

but the growth trend is impressive and

suggests a lot more to come.

The Goldman Sachs Commodities

Index, the most widely traded, has risen by

an annual 12.5 per cent since 1970.“It

outperformed financial assets in 2002,

2003 and 2004 and I believe it will do so

again in 2005,”Weiser says. He adds that

the growing long-only client base consists

primarily of pension funds, endowments

and insurance companies, with a certain

amount of interest from private banks.

US and Dutch pension funds are among

the notable newcomers to this market. UK

pension funds, another large potential

client pool, have yet to take the plunge.

However, Britain’s largest pension fund

manager, Hermes Investment

Management, is widely believed to be on

the verge of making its first move into

commodities. One of its managers has

gone so far as to address a recent

commodities investment conference in

Hong Kong on the subject.

“We’re still waiting for someone to take

the lead in the UK market,” says Torsten

de Santos, director of commodity

investment solutions at Barclays Capital.

“If it’s Hermes, that will influence many

other UK pension funds.”

The usual entry point for institutions

has been to invest in commodities

indices by buying front-month futures

and rolling up the curve. That in itself has

an impact on the market.“So many

investors have come into the market that

the rolling yield between the immediate

contracts has been affected,” de Santos

points out.“The challenge for us has been

The Goldman Sachs CommoditiesIndex, the most widely traded, has risenby an annual 12.5 per cent since 1970

THERINGSIDER



new type of customer: bond funds and

other fixed income investors.

This is due to the fact that Barclays

Capital’s CCO, called Apollo, mirrors a

credit instrument. Rated by Standard &

Poor’s, it gives investors exposure to

commodities while retaining a fixed

income format. Structurally similar to a

collateralised synthetic obligation (CSO),

its underlying derivatives assets are so-

called ‘commodities trigger swaps’. Trigger

events, instead of credit default events, are

determined by commodity price levels

and erode the capital, but do not affect

the coupon. Losses are apportioned to

investors based on their position in the

capital structure’s pecking order. Barclays

Capital says it has sold CCOs to insurance

companies, commercial banks and hedge

funds in Europe and the US.

Commodities can be structured to

imitate equities as well as bonds. Because

of their long familiarity with equity

products, some institutional investors and

hedge funds like to replicate them in their

commodity investments, according to

Xavier Lannegrace, head of Europe and

Asian commodities sales at SG Corporate &

Investment Banking.

“As a result, we have seen a sharp

increase in structures such as ‘best of

baskets’,” he explains.“This is where the

investor designs several baskets of

commodities, each comprising several

commodity underlyings (notably metals

and energy), and receives a yield on the

best performing basket.”

These products, Lannegrace adds, can

also combine several asset classes with

hybrid structures, paying the best

performance between baskets of

equities, commodities and indices.

“Investors can also trade more

sophisticated products, such as de-

correlation structures, where the yield

rises when several baskets diverge from

their average performance,” he says.

“Most of these structures feature fully or

partly guaranteed capital.”

Whether via indices or structured

products, no one doubts that the influx

of long-only investors will continue, and

all agree that the market as a whole

will benefit.

“They are a welcome force,” says de

Santos.“They add to liquidity in these

markets in a non-threatening way,

because they are very predictable. And

that in turn helps the market to attract

more producers and consumers to risk-

manage their exposure.”

De Santos’ summary is a fair one.The

influx of institutional investors to

commodity markets will continue, and the

potential sums of money to be invested are

immense. Since they are, by and large, the

most orderly of investors they will boost

liquidity without adding to volatility. And

that will be good for everyone.

to help them access the full spectrum of

the market, not just through the front of

the forward curve, but by looking further

down the curve.”

That has led to the development of

structured notes, where the investor

effectively buys a bond with a coupon

linked to a basket of, say, base metals

futures based on the longer end of the

curve.“The performance of a commodity

index is path-dependent, whereas the

performance of a structure linked to a

basket of commodities is path-

independent,” de Santos explains.

Moreover, he adds, basket options are

cheaper because of lower volatility at the

long end and the ‘out-of-the-moneyness’

of the optionality.“An at-the-money spot

option is in fact an out-of-the-money

forward option, because the long-dated

forward point on which the option is

priced is below the spot price,” he says.

Since basket options are cheaper, they

allow higher participation rates. Yet de

Santos acknowledges that neither the

index nor the basket strategy is superior at

the outset, since subsequent

outperformance will depend on the

development of the shape of the curve.

At the end of last year, Barclays Capital

nudged the growing sophistication of this

market one notch higher by introducing

the world’s first collateralised commodity

obligations (CCOs). The instrument opened

the gates of the commodities market to a

The influx of institutional investors to commoditymarkets will continue, and the potential sums of money to be invested are immense

THERINGSIDER

MARKET ISSUES: EXCHANGE RATE EFFECTS

139

PETER HOLLANDS, LEON WESTGATE, CHRISTOPHER WELCH AND ADAM SOTOWICZOF BLOOMSBURY MINERALS ECONOMICS EXPLAIN THE SHORT- AND LONG-TERMIMPACT OF EXCHANGE RATES ON LME METALS PRICES


The ignored price driver

In the case of the short-term effects of

exchange rates on LME metals prices, two

price drivers, LME stocks and the dollar to

euro exchange rate, combine to account for

the bulk of daily price variation for copper

and zinc, aluminium and lead.Where metal

stocks are still above the ‘pinch point’ (as in

the case of aluminium), exchange rate is the

dominant price driver, stocks a secondary

influence.Where stocks are below the ‘pinch

point’ (as is the case for copper), they

become dominant, and exchange rates

become secondary influences.

As for long-term effects, stock levels

fluctuate cyclically. Excluding fundamental

technological change, shifting exchange

rate regimes are the primary driver of

changing long-term equilibrium prices in

dollars. Bloomsbury Minerals Economics

(BME) argues that the consensus on future

long-term prices in dollars is 10 per cent

too low for aluminium, 20 per cent too low

for the other LME metals.The consensus

has illogically been based on actual

historical instead of likely future exchange

rate regimes.The levels to which far

forward LME prices are showing mean

reversion support the BME view of higher

future long-term averages.

Metals are mined, smelted and refined,

fabricated and consumed, scrapped and

recycled, bought and sold, in many

different countries, under a host of

exchange rate regimes.The theory, as set

out in elementary economics textbooks is

that price fluctuations will cause different

quantities of metal to be offered and

sought by sellers and buyers – the price

discovery process – with the price

eventually settling at the level where

supply equals demand.The relationship

between quantity offered and price is

2100

2050

2000

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Figure 1: Aluminium prices and the $/E rate

US

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Al CashAl3mDollar- Euro Ex rate

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Figure 2: Aluminium prices and LME Stocks




termed the supply curve and that between

quantity demanded and the price is called

the demand curve; the equilibrium price is

at their intersection.

What the elementary textbooks tend not

to mention is that while, in most global

commodities markets, cash and forward

prices are set in US dollars, the spot and

forward supply and demand curves for

those commodities shift second by second,

24 hours per day, with every variation in the

buyers’ or sellers’ spot and forward

exchange rates against the dollar. Price

response to these exchange rate shifts

comes in two stages: an instantaneous

change (mostly mirroring the dollar/euro

rate), driven by traders and/or speculators,

then a longer-term re-adjustment if or

when the ‘instant’ speculatively driven shift

over- or under-anticipates the dollar price

change needed to restore longer term

equilibrium after a move by the dollar

against a basket of currencies.

It is not just elementary textbooks that

neglect the impact of exchange rate

fluctuations. Most analysts prefer to do the

same, as do mining and metals industry

executives. They are almost all required to

forecast metals prices, and very few

people in the mining or metals industries

seem comfortable forecasting exchange

rates. Accordingly, they tend to ignore the

influence of exchange rates on metals

prices altogether, rather than venture into

an area so tricky. Traders, conversely, have

a close intuitive feel for exchange rate

effects, though even they seldom quantify

the effect analytically.

Whatever one’s view of the difficulty of

forecasting exchange rates, if one is to

understand historical price trends and the

current price, it is essential to take

exchange rates into account.They are one

of the two key drivers of short-term price

variation.The other is LME stock levels. In

fact, when LME stocks are high (above the

‘pinch point’) currency variations can be

the most important short-term driver of

price variation.Where LME stocks are tight

(below the ‘pinch point’ especially),

exchange rate effects can come a close

second to stock change effects, day by day.

It is worth taking a closer look at four

metals whose price behaviour is relatively

well understood: copper, zinc, lead and

aluminium. In the charts we show time

series for prices and stocks then prices and

exchange rates.

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Figure 3: Zinc prices and the $/E rate

Figure 4: Zinc prices and LME Stocks

Figure 5: Copper prices and LME Stocks


• Short-term aluminium price variation

Although declining, aluminium stocks

remain fairly plentiful and are well above

the ‘pinch point’. As a result, exchange rate

fluctuations have been the dominant

short-term driver of price. Figure 1 (see

page 139) shows that for the whole of the

past year there has been a close

relationship between the dollar price of

aluminium and the dollar versus euro

exchange rate.The LME stock to price

relationship for aluminium was close only

when its influence was in the same

direction as exchange rates. Once the two

diverged in March 2005, the relationship

between stocks and prices diminished

drastically (Figure 2 – Page 139).

• Short-term zinc price variation

Zinc stocks are still high, but less excessive

than those of aluminium. Figures 3 and 4

(see page 140) allow one to perceive a

more even balance of power between

exchange rates and stocks in their

influence over prices. Cash and three

months prices for zinc peaked in March

2005, roughly mid-way between the times

when the bullish influence of exchange

rates and stocks was strongest (December

2004 and May 2005, respectively).

• Short-term copper price variation

Copper’s situation has been the reverse of

aluminium’s.With copper stocks well

below the pinch point, they have been the

dominant driver of price, as Figure 5 shows

(see page 140).The relationship of

exchange rates to prices was close only

while currencies’ influence pointed in the

same direction as the influence of stocks.

Once the influence of the two became

opposed, in May 2005, the link between

exchange rates and copper was lost

(Figure 6).With stocks now the dominant

short-term influence on copper prices and

currencies the main influence on

aluminium prices, life has become rather

difficult for those wanting to trade the

copper versus aluminium price spread.

• Short-term lead price variation

With lead stocks also well below their

pinch point, one should expect LME

stocks to be the dominant price driver

and exchange rates the secondary driver.

However, as Figures 7 and 8 illustrate, the

two price drivers have been pointing in

the same direction as each other for

almost the whole of the past year,

making comparisons difficult. Divergence

between the influences of the two


1 Jul 04

15 Jul 04

9 A

ug 04

23 A

ug 04

7 Sep

t 04

22 S

ept 0

46 O

ct 04

20

Oct 0

40

3 N

ov 04

17 Nov 0

41 D

ec 04

15 Dec 0

431 D

ec 04

14 Jan 0

528

Jan 05

11 Feb 0

526

Feb 0

511 M

ar 05

30

Mar 0

5

13 A

pr 0

59 M

ay 05

23 M

ay 05

7 Jun 05

21 Jun 0

55 Jul 0

519

Jul 05

3700

3500

3300

3100

2900

2700

2500

US

$/t

3900 0.68

0.7

0.72

0.74

0.76

0.78

0.8

0.82

0.81

0.86

Exc

hang

e R

ate


Figure 6: Copper prices and the $/E rate

1 Jul 04

15 Jul 04

9 A

ug 04

23 A

ug 04

7 Sep

t 04

22 S

ept 0

46 O

ct 04

20

Oct 0

40

3 N

ov 04

17 Nov 0

41 D

ec 04

15 Dec 0

431 D

ec 04

14 Jan 0

528

Jan 05

11 Feb 0

526

Feb 0

511 M

ar 05

30

Mar 0

5

13 A

pr 0

59 M

ay 05

23 M

ay 05

7 Jun 05

21 Jun 0

55 Jul 0

519

Jul 05

21000

26000

31000

36000

41000

16000

51000

56000

61000

66000

LME S

tock

s


Figure 7: Lead prices and LME Stocks1050

1000

950

900

850

800

US

$/t

1050

1000

950

900

850

800

US

$/t

0.68

0.7

0.72

0.74

0.76

0.78

0.8

0.82

0.84

0.86

Exc

hang

e R

ate

1 Jul 04

15 Jul 04

9 A

ug 04

23 A

ug 04

7 Sep

t 04

22 S

ept 0

4

6 O

ct 04

20

Oct 0

40

3 N

ov 04

17 Nov 0

41 D

ec 04

15 Dec 0

431 D

ec 04

14 Jan 0

5

28 Jan 0

511 Feb

05

26 Feb

05

11 Mar 0

530

Mar 0

513

Apr 0

59 M

ay 05

23 M

ay 05

7 Jun 05

21 Jun 0

55 Jul 0

519

Jul 05

1100


Figure 8: Lead prices and the $/E rate

THERINGSIDER 142

drivers was seen in October-November

2004 and March-June 2005, when stocks

were clearly the main driver, exchange

rates secondary.

Longer term exchange rate issues In the longer term, periods of excess stocks

and tight stocks come and go for the

different metals. Long-term trend changes in

exchange rates can become more important

in their influence on long-term equilibrium

prices.Table 1 shows BME’s assessment of

underlying long-term equilibrium prices

under different exchange rate regimes.The

table is in two parts.The first part shows

underlying long-term equilibrium prices for

the LME metals under an exchange rate

regime in which the dollar floated against

the euro but was fixed at 8.28 Rmb.Taking

copper as an example, with $1 equal to E0.9-

1.0, copper’s underlying long-term

equilibrium price would have been around

$2000-2200 per tonne, according to our

analysis. At today’s exchange rates, with a

dollar worth little more than E0.8,

underlying equilibrium would be close to

$2425 per tonne, according to our

modelling.The table illustrates our view on

equilibrium prices for the other metals too.

Part 2 of Table 1 shows BME’s very

tentative conclusions on how underlying

long-term equilibrium prices in dollars

would potentially be affected by any

appreciation of the Renminbi (and other

Asian currencies) against both the dollar

and the euro.Thus to take copper as an

example once again, at 7.0 Rmb = US$1 =

E0.8, we would put the underlying long-

term equilibrium price for copper at $2475

per tonne.

Long-term prices and perceptions in the

mining and metals industries

The long-term equilibrium prices put

forward by BME in Table 1 can be compared

to industry perceptions in three ways.

The first of these is the far forward LME

quotes. Copper and aluminium can be

traded out to 63 months on the LME.With

the far forward prices, cyclical supply-

demand influences drop out and the price

reverts towards the metals trades’

perception of forward-looking long-term

averages. Far forward prices for copper and

aluminium confirm BME’s conclusion that

the weakening of the dollar into the euro

0.8-0.9 range has already increased forward

looking long term equilibrium prices.

The second method is to poll the mining


Table 1: Long-term equilibrium prices in US dollars at different exchange rates

and metals industries and their analysts on

long-term equilibrium prices. As a

generalisation, it emerges that the industry

uses historical average dollar prices of

metals as a guide to the future. BME would

comment that the history was for the dollar

to have been much stronger than it is

today.The mining and metals industries’

explicit forward looking metal price

consensus has been implicitly formulated

under their backward looking exchange

rate experience. It is thus a wholly illogical

consensus unless a reversion to historical

exchange rates is expected.The forward

exchange rate curve indicates that this is

not the currency market’s view.

The third method would be to work

backwards from stock market valuations of

metals and mining companies to implied

long-term metals price assumptions of

shareholders.That however is beyond the

scope of the present article.

At BME we therefore conclude that the

mining and metals industries may need to

take more notice of divergence between

actual past and likely future exchange rate

trends and between the actual past and

likely future metals price behaviour that

would result from it.Those who are not

comfortable forecasting exchange rates

need only to use forward exchange rate

curves instead of forecasts. Metals market

analysts may need to do likewise. As for the

market itself, LME far forward metals prices

have already made the adjustment to a new

exchange rate regime.The market knows

more than any single participant in it!

Peter Hollands is Bloomsbury Minerals

Economics Ltd’s managing director, Leon

Westgate its minerals economist and Christopher

Welch its geological and mining industry data

analyst. Adam Sotowicz is BME Price Models Ltd’s

IT and market models manager. Bloomsbury

Minerals Economics Ltd and BME Price Models

Ltd produce and license interactive models of the

behaviour of cash prices and forward curves for

all six LME metals. For further information,

contact [email protected]

Figures in blue: backward-looking equilibrium prices

Figures in green: today's forward looking long-term equilibrium

Figures in red: possible underlying equilibrium after big Rmb appreciation

Part 1: the old system, $/Rmb stable, $/E the real issue

$1= $1= $1= $1=

E0.80 E0.90 E1.00 E1.10

8.28Rmb 8.28Rmb 8.28Rmb 8.28Rmb

Al 1650 1600 1550 1500

Cu 2425 2200 2000 1950

Ni 8625 7750 7025 6400

Zn 1150 1050 950 900

Pb 700 650 600 550

Sn 6125 5475 5000 4700

Part 2: brave new world – Rmb appreciation against both $ and E

$1= $1= $1= $1=

E0.80 E0.90 E1.00 E1.10

7.0 Rmb 7.0 Rmb 7.0 Rmb 7.0 Rmb

Al 1725 1675 1625 1575

Cu 2475 2250 2050 2000

Ni 8850 7950 7200 6550

Zn 1200 1100 1000 950

Pb 725 675 625 575

Sn 6425 5750 5250 4925

The above are tentative and intended for discussion purposes only.

Source: Peter Hollands, Bloomsbury Minerals Economics Ltd, 8th August 2005

(in part derived from BME's interactive price models for the LME metals)

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