 Wallace Street Journal
Metals are in for a nice, long ride
David Bond
Archives
Editor, Silver Valley
Mining Journal
December 7, 2004
LONDON, 4 December, 2004 -Industrial demand both from the West
and from China will continue to fuel higher base metals prices,
although nickel has likely reached a plateau and could fall slightly,
analysts at the London Mining Journal's Mines and Money conference
at the Hammersmith Novotel in King Street said this week.
Even the "soft landing" being engineered by China government
officials likely will result in a sustained GDP growth rate of
9 percent per year in the near future, about on par with Q3 2004,
said Bob Kwauk of the Toronto-Beijing law firm of Blake Cassels.
That's down just slightly from a 10 percent growth rate in Q1,
he said. Long-term, China's GDP will grow 8-9 percent per year
for the next two decades, Kwauk said.
China has throttled back credit in its steel and real estate
sectors and raised internal interest rates, but will rely increasingly
on imports for steel, lead, zinc, nickel and copper. "There
is a dire need for China to lock down huge offtake agreements
in those metals" from miners in the Western hemisphere and
Australia, he said. China is now consuming 20 percent of world
aluminum production and 33 percent of its steel output and has
made purchase commitments throughout South America for alumina,
iron and steel. As an example of China's continuing growth, Kwauk
noted that at decade's beginning Beijing sported 800,000 automobiles;
now 2.1 million Beijing cars traverse the city's "automobile-unfriendly"
streets. "You guys went through this, what, 100 years ago?"
he quipped. Two factors are influencing demand; a drastic fall
in import tariffs for automobiles and a rise in the size of China's
middle class and its discretionary income.
But China's growth numbers do not fully explain global metal
use, because much of China's consumption is a mere relocation
- up to perhaps 30 percent - of the world manufacturing base
from Europe and the Americas to Asia, said Stephen Briggs of
Societe Generale.
"China's growth somewhat is displacing demand elsewhere,"
Briggs said. Rising U.S. demand for industrial metals also is
a factor in the worldwide price game. Fundamentals for all but
nickel remain good through the end of 2005, largely because mines
and smelting capacity are still catching up with demand. Nickel
has, or will, become the first of the base metals to reach a
market equilibrium, he said. "Demand for nickel is sensitive
to price. With the price increase has come a shift to stainless
steel scrap or to forms of stainless steel that use less nickel."
Copper production also is catching up to demand, he said. However,
brighter days are ahead for zinc and aluminum. Available aluminum
scrap has kept the bulls at bay, but most scrap is being channeled
into China now and the pressure is on for raw alumina. "The
best for aluminum is yet to come," he said. Ditto zinc,
he said, if for no other reason than funds will be that is comparatively
lackluster performance is bound to improve.
Whether fund buying is the cause of rising metal prices or merely
a reaction to it is a "chicken and the egg" question,
he said.
Mitsui's Andy Smith, who played his characteristic gleeful Falstaff
to gold's bulls, alleged that precious metals and PGMs are hugely
overpriced. Illustrating his case with overhead projector graphs
superimposed upon the décolletage of well-endowed women.
"Are precious metals top-heavy? Yes," Smith said. Precious
metals aren't getting their boost from fundamentals but from
a weak dollar and a reaction to the re-election of U.S. President
George W. Bush.
"The U.S. election is still being fought out in the currency
markets, and they won't get over it," he said. Gold has
remained fairly flat relative to the Rand, the Euro and the Australian
dollar, Smith said.
A reduction in the global hedge books for gold also has fueled
the dollar price increase for the metal, he said. "A mining
company buys another mining company and liquidates its hedge
book. The metal price goes up, the merger looks good, and it's
a nice, virtuous ponzi scheme. Even war talk isn't beneficial,
he said: Starbucks and McDonald's have done better since the
start of the Iraq war than the HUI gold bug index," Smith
said. "There's a broken gear somewhere."
But Smith's perennial role as the nabob of naysaying for precious
metals, albeit comic, is wearing thin, fund managers and bankers
in attendance said. "Good God, we're looking at a $2 (USD)
pound by Christmas," said a London banker. "Am I the
only one worried?"
Precious metal mining's emergence as a world-class player was
best stated, and understated, by the presence of a prince and
London's Lord High mayor at this week's confab, only the Mining
Journal's third since 1890.
Some 800 delegates paid 675 quid apiece to attend this Hammersmith
event. The Mining Journal's first such congress was convened
here in 1890 - the second one was held last year. Noted Prince
HRH Prince Michael of Kent in his kick-off address, the Journal's
annual congress is lately occurring with "rather more frequency."
Attendance is up 200 from 600 a year ago.
The prince, who in addition to his English royal blood is a relative
of Russia's Czar Nicholas II, frequents the old Soviet Union,
is fluent in Russian and most other European languages, chairs
the Russo-British Chamber of Commerce, and has worked to facilitate
mining deals between English operators and Federation enterprises.
"I have heard it said in the mining industry, that if it
can't be grown it has to be mined," he said - words from
a bumper sticker created by Wallace, Idaho's own late Lovon Fausett
of Wallace Diamond Drilling and Atlas Mining.
While Toronto has at last bested London as the principal source
of equity capital for new mining projects, the prince said London
still leaves its mark on the world mining scene, first with its
universities - the Cornwall School of Mines and the Imperial
School of Mines - and by the fact that most international mining
deals are governed by English law and courts. "The countries
that dominate the mining industry are English-speaking countries,"
he said, including Canada, South Africa, Australia and the United
States. (What England's official language is anymore, the prince
didn't say.) Technology will be of great aid in helping to reduce
mining's footprint on the environment, he said. Biological agents
may some day replace chemical reagents such as cyanide in the
extraction of minerals, he said. Lord Mayor Michael Savory, who
is also chairman of stockbroker services for HSBC and a licensed
broker, said mining is the "heart of London's financial
cluster. It is the Leviathan."
London, in turn, is not just British but an "international
brand for all financial and business services." While Toronto
leads the mining world in equity financing these days, he said,
London is still very much the source for mining debt financing.
What impressed us most about the scene here in Old Blighty is
the prevalence of both sources of funding - equity and debt -
for the mining industry, their checkbooks out. Snap the cap off
a cold one and consider this: two years ago you couldn't have
drug a dead dog to a mining conference, even to Rio and drinks
were on the house. Now not only a prince, and the mayor of Planet
Earth's only real city, but the big-bucks boys are buying us
dinner in Mayfair and circling the chairs. They are scared to
death of the US dollar and don't want to be left standing when
the music stops. In times like this, only silver will suffice.
Ninety percent of the time, mining money is a losing proposition.
Welcome to the 10 percent that ain't.
David Bond
Archives
Editor: Silver Valley
Mining Journal
David Bond covers gold
and silver mining equities for a number of national and international
publishers, including Platts Metals Week, a division of McGraw-Hill.
He lives in Wallace, Idaho, heart of the planet's richest silver
fields, the Coeur d'Alene Mining District. He is former editor
of the Wallace Miner, and holds regional and national firsts
in investigative journalism from the Atlantic City Press Club
(National Headliner) and from the Society of Professional Journalists
(SDX/SPJ) and has edited or written for newspapers on both coasts,
Canada and Alaska.
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