Nothing gets the creative juices flowing more than a good debate! We, particularly, enjoy debates in which we see nearly opposite points of view, all within the same time period. In today’s headline match, we examine one side of a debate around the direction of metal prices, particularly for copper, aluminum, zinc and steel as a result of the Japanese earthquake and tsunami. In the ring we have Goldman Sachs, who laid out their point of view according to a recent Reuters Metal Insider piece: “Demand and price risk for industrial metals has now skewed to the downside due to recent developments including Japan’s earthquake disaster, and as tighter monetary policy is priced in. In the other corner, we have MetalMiner’s own Stuart Burns, who on March 17, only six days after the natural disaster suggested demand may appear down but not out (and with it, prices).
When we received a call from Wayne Atwell, managing director of Casimir Capital, and he offered up some commentary on the direction of metals and mining markets post-Japan tsunami, we wanted to know who would win the fight, so to speak. Wayne reminded us of a metric he and many others in the metals industries use to assess demand for particular products specifically, metal intensity. We have seen this metric expressed as a number (or quantity) per individual or, as Wayne explained, as a percentage of global consumption by country. He suggested the following metal intensity levels:
Japan: 4.7% of aluminum, 4.9% of copper, 4.2% of zinc and 2.4% of thermal coal
By way of comparison, China appears as follows:
41% of aluminum, 39% of copper and 41% of zinc
“The Japanese economy has been hurt badlyÂ¦in the short term, they will consume less material. But metal prices are higher today then when this story unfolded. The earthquake/tsunami has thus far had no detrimental affect on prices, Wayne said, though he did acknowledge that the rebuilding effort will go “slower than you think. The sheer task of removing debris, gas shortages and moving goods in and out of the country will make for a slower recovery. Plus, designs will have to be drawn up and approved. From a commodities perspective, we can expect the demand to increase in about a year to a year and a half.
Which metals will likely [eventually] benefit from increased demand as Japan rebuilds? According to Wayne, “Zinc is the one on the top of the list – 45% of zinc goes into galvanizing, 33% of copper goes into building plumbing and electrical and the like. Aluminum is pretty far down the list 10% of aluminum goes into building (much smaller).
But some metals supply markets will remain in short supply far in advance of any rebuild. In particular, according to a recent report from The Smart Cube, though annual steel production will likely drop due to rolling brownouts (and the Chinese will likely pick up the slack), two areas within the Japanese steel sector may create global supply shortages and subsequently, higher prices hot rolled heavy plate and galvanized sheet. The Smart Cube report gives an excellent overview of other supply markets in which Japan plays a key role.
But in essence, according to Atwell, “the market has sort of yawned at commodity prices. Uranium is down, coal is up as is natural gas, though that is harder to transport. You would need an LNG terminal for that. Hydro power is already operating at 100% of capacity.
Certainly, commodities tied to energy sources (nuclear uranium being the one exception) will see price escalation. Beyond that, whether falling demand or tight supply will deliver the knock-out blow, we may have to wait it out and go the distance.