When Will Reduced Capacity Translate to Higher Metal Prices?

Continued from Part One.

In China, about 700,000 tons of capacity have been idled in recent months in the top-producing province, but the reality is this has been replaced by new, lower-cost capacity in western provinces — capacity is still growing at double-digit rates. A Reuters article notes that the aluminum market is expected to have a surplus this year of 445,000 tons, quoting a poll of 18 analysts questioned in April.

Janet Kong, managing director of research at China International Capital Corp. is quoted by Reuters as saying many high-cost smelters run by state-owned firms are reluctant to close down due to concerns about unemployment. Her estimate is 15,000 yuan per ton may be needed for deeper cutbacks. The domestic Chinese aluminum price is currently hovering around 16,030 yuan per ton, according to the MetalMiner IndX℠.

The zinc market is also burdened by excess supplies and is expected to have a global surplus of 249,000 tons this year, the sixth consecutive year of surplus, and inventories at LME-registered warehouses have ballooned to 943,325 tons, the highest since 1995, the report says.

But although the cost of production is at or around current numbers, producers of both metals have been cushioned by high spot premiums paid for physical delivery. In the case of aluminum, this could be up to $220-240 per ton for duty-unpaid metal in Rotterdam, as with zinc, supported by the squeeze put on the market by the stock and carry trade.

The swing market for nickel has traditionally been occupied by Chinese nickel pig iron (NPI) producers, said by Reuters to be below water at current nickel prices of $16,700 per ton, since break-even is about $17,000 per ton. But conflicting reports also say new EAF NPI technology has lowered production costs and it is only older facilities that are at risk.

The upshot is, dire as commodity prices are compared to just a few years ago and in spite of rampant cost inflation in the mining industry, miners are not hurting enough for us to see the kind of widespread closures we would need to significantly uplift prices.


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