We wrote in May on lead and last month on zinc, two metals that after years in the doldrums rose rapidly in price during 2006 to record highs in 2007, only to fall back over the last 6 months to levels not much above their historic norms. The rapid rise in price encouraged massive investment in new mining facilities including the Lennard Shelf Pillara mine in Western Australia, jointly owned by Xstrata and Teck Cominco, two mining giants with a long and successful track record in developing and running mining ventures. So their decision this week to close the mine after just 18 months of operation is testament to the unpredictability of the commodities markets and a reminder that what goes up eventually comes down.
The Pillara mine was re-started in January 2007 with a planned life of 3-4 years. During 2007 it produced 42k tons of zinc and 12k tons of lead, less than budgeted. The operators sited a number of additional reasons for closure most obviously the sharp decline in the metals prices but also the appreciation of the Australian dollar, plus higher energy and labor costs.
In itself the closure of Pillara will not support the price of zinc or lead. The Chinese have cut back production in recent months officially to support the price, unofficially because at these current levels some operators are not making money. It will take more capacity coming out of production to give support to the price in the medium term but maybe this is the first of more closures. If big names like Xstrata and Cominco can’t make zinc and lead pay, who can?