Market Analysis

An intriguing article in CPO Agenda entitled “The return of make or buy” looks at the perennial question of whether it is better to manufacture all parts, components and materials in-house or whether the thinking of the last decade still holds true that everything should be outsourced that is not core competency. Of course, that phrase can be defined in any number of ways and often looks different depending on the industry in question. Steel makers, for example, have been vertically integrating into iron ore mining since the latter years of the last decade as the big three iron ore suppliers evolved to take a dominant position in the supply and pricing of iron ore. Prior to that the new wave of competition, Asian steel mills had relied almost totally on the seaborne iron ore market for supplies, but in the last few years both Asian and European players (like Corus) and global players (like ArcelorMittal) have been investing heavily in new mines and buying into existing junior miners to secure supply. Security of supply has become of paramount importance for any industry facing raw material supply issues, such as parts of the metals industry, of late.

In the article, Uwe Schulte, a former head of global procurement at Unilever and now owner of the Prosolvo consultancy, gives three examples of when a company might want to maintain its production facilities in-house:

  • where ensuring capacity ahead of competitors would otherwise come at an unfeasibly high price;
  • where there is the threat of a leakage of knowledge, particularly where this know-how is unpatented;
  • or, where the price-forming mechanism is not under their control, as with steel mills and iron ore. “If there’s high variability in demand and supply you’d probably want to own the assets, he is quoted as saying.

The financial crisis of 2008 has thrown some new dynamics into the mix, which for some companies have changed the desirability of outsourcing key products. Firstly, volumes are down for many industries; think of auto manufacturing in the US. Many auto suppliers have struggled to adjust to the reduced volumes post-2008 and there has been a rationalization in the supply base. Some OEMs in such situations are faced with making this decision: do we step in and rescue a key supplier, or let them go and seek new supply options? The article states results from a survey by CPO Agenda in November last year,   which revealed that 9 percent of CPOs had been forced to invest capital in a supplier’s business during the downturn to help ensure their survival, while 3.6 percent had acquired a failing and/or strategic supplier.

Secondly, although firms are well capitalized after good profits during the last decade, new capital can be difficult to secure and investing in internal manufacturing sometimes comes second to cash flow considerations.

Thirdly, the supply base has suffered capacity reductions, making previously secure supply chains vulnerable to supply shortages — the European aluminum large bar and plate markets are a case in point. A combination of capacity closures in established markets like the UK and more buoyant domestic markets in producers’ home markets, like Russia, have conspired to result in a very tight physical market this year in Europe. While it is impractical for OEMs to buy extrusion or rolling mills, we have seen OEMs developing strategic relationships which have resulted in investment and technology transfers in return for exclusive or guaranteed supply relationships such as Boeing’s collaboration with Russia’s titanium producer VSMPO.

How much further this process has to run remains to be seen and certainly the effect is greater for some industries than others, but at least the one-way traffic of outsource manufacturing to emerging markets is showing a return flow in the new normal we are living through and where supply-chain specialists have never had such a crucial role in manufacturers’ range of competencies as they do today.

–Stuart Burns

We have been hearing a lot of cheery news about GM this year, not least its IPO and successful fund raising, the launch of the Volt and a return to profitability, even on what is a historically low level of sales. So it is interesting to read an alternative viewpoint by Edward Niedermeyer, editor of the Web site The Truth About Cars espoused in a NY Times article.

The article takes GM in particular to task, but ropes in Chrysler and Ford in its criticisms on a number of fronts, not least for failing to live up to President Obama’s hype at the time of the bailout that Detroit was turning its back on gas-guzzling trucks and SUVs and would become the world leader in fuel efficient transport, meaning smaller engine petrol cars or hybrids. Taking General Motors as an example, the NYT states sales of actual cars this year have fallen by nearly 6 percent compared with last year’s already anemic numbers, while light trucks (which include pickup trucks, SUVs, minivans and crossovers) are up by more than 16 percent. Nor is fuel efficiency making big gains: according to the EPA, the Big Three are among four of the lowest average fleet fuel economy ratings among front line manufacturers, and none achieves the industry average of 22.5 mpg. But to what extent are GM, Chrysler or Ford at fault for this? They all produce a range of cars and light trucks in response to what the market demands. With some justification, critics could argue that Detroit’s offerings in the small- to medium car market are not as attractive as those from European or Japanese manufacturers, leaving the Big Three with sales only in larger vehicles. Even hybrid sales have been disappointing — a quarter of all the hybrids built by Detroit has been bought by federal agencies, graphically underlining the public’s attitude toward models like the Volt compared to Toyota’s Prius, for example.

As if GM’s lack of small car development was not enough, the company stands accused of further misdemeanors. As a result of poor demand for the manufacturers’ product range, all the Detroit car makers were guilty to varying degrees of stockpiling or over-production, then offering large cash discounts to move that stock, and an excessive reliance on discounted fleet sales, all of which led directly to poor brand identity and low residuals. It would appear from the article that GM and Chrysler are relying on the same tactics, reporting production as if they were sales, building inventory GM now has three months worth of sales sitting in lots and falling back on fleet sales to shift cars (32 percent of the Big Three’s October sales were to the fleet operators.)

This has not passed the markets by. Trading today at around $33.50-34, GM’s stock price has yet to reach the $36 a share it reached on its first day of trading last month, in spite of the wider market rising from 11,000 to 11,400. Does this matter so long as GM is trading somewhat profitably? Yes, to have a viable long-term future the company needs an attractive product range that can compete across a broad spectrum of the market. It needs to operate sound business practices, not adopt the tactics that got it into bankruptcy in the first place. For suppliers, for workers, and for the taxpayers that bailed them out, GM and Chrysler need to do more than just divest themselves of bad working practices and accumulated responsibilities — they need to transform themselves into modern automotive manufacturers. It sounds as if they may have some way to go.

–Stuart Burns

A Reuters article this week supports comments elsewhere that demand from auto makers in emerging markets and investor interest in new exchange-traded products in base metals are likely to drive lead prices higher next year. Lead, now around $2,450 a ton, will rise to above $2,500 a ton on average, with some analysts saying it may even cross the $2,700 mark.   Demand for lead is steadier than for most other base metals, the article says, as about 40 to 50 percent is for replacement batteries, making it very resilient to ups and downs in new car sales. China’s auto sector and rebounding production in Europe and North America have boosted demand for batteries this year.

However, as scrappage schemes in Europe fade out, attention is focused on economies such as China, India and Brazil.

Vehicle sales in China could exceed 17 million units this year, Reuters quotes Deutsche Bank, who sees that rising to some 20 million in 2011.

Source: Kitco

Meanwhile, the International Lead Zinc Study Group (ILZSG) announced this week that the global lead market was in surplus by 51,000 tons in the first ten months of the year. Intriguingly, while producers’ stocks fell to 139,000 tons in October from 142,000 tons in September, up only slightly on end-2009 stocks of 135,000 tons, the LME has gone in the opposite direction. LME lead stocks are at a 10.1/2 year-high and, at above 200,000 tons, are about five times higher than two years ago.

Source: Kitco

As China fears and risk appetite waned, the rising stock position for lead, as with aluminum, meant lead’s rebound in price was not as dramatic as, say, copper, for which falling stocks are a clear sign of a tightening physical market.

The consultancy CHR Metals sees the lead market tipping into a very modest deficit next year, as Chinese consumption remains robust. Others such as BNP Paribas say the 90,000-ton surplus will remain next year and a deficit will not develop until 2012. China is both the biggest consumer and the biggest producer; demand may slow next year if credit tightening and interest rate hikes cool demand as Beijing hopes. Meanwhile, although production this year has been hit by power cutbacks, next year there should be sufficient power available from the New Year and production is expected to rise, according to state research firm Antaike, causing a surplus in the domestic market. The lead price has not responded to the general bullishness surrounding copper and like some of the other metals has struggled to make return to fall highs. One positive development could be the launch of the SHFE lead contract in the second half of next year which, according to Societe Generale, could promote arbitrage activity between London and Shanghai to lead’s benefit. The bank is forecasting $2,775 per ton next year.

Much will depend on risk appetite among investors, GDP growth and particularly auto/e-bike sales in both emerging and developed markets. On balance, we don’t see the fundamentals supporting lead at $2,775 per ton and feel $2,600 is probably the top end for the first half as supply will continue to outstrip demand, but with so much uncertainty around, a narrow 90,000-ton surplus could evaporate quite quickly, in which case the current $2,450-per-ton prices may look good come the summer of 2011.

–Stuart Burns

We’ve all read about the tenuous relationship between US importers and Chinese exporters that colors anti-dumping news, with the requisite lists of duties and suspensions that are in line for metal products. But a new concern lurks behind the dumping dispatches; one that may come into play pretty heavily in future US-China trade — some may argue it already has — especially in terms of affecting US exports.

The debate over certain elements of intellectual property rights (IPR), a contentious issue here in the States, has now spilled over into the macroeconomic forum between the US and China. It’s long been known that Chinese pirating of copyrighted works, for example, is commonplace, but this is the first time that a federal-level investigation will try to put a quantitative stamp on the extent to which IPR infringements in China can devastate US business there. This comes from one of two reports, released by the US International Trade Commission (USITC).

China has been robustly advancing “indigenous innovation policies, which the US sees as undermining its firms’ business opportunities in China’s economy. “This “web of policies” often embedded in government procurement, technical standards, anti-monopoly, and tax regulations may make it difficult for foreign companies to compete on a level playing field in China, the USITC’s news release states. The graph and table below show the extent of China’s involvement at every stage of the supply chain.

Source: USITC

The first report found that the extremely weak or even non-existent enforcement of IPR leads to “widespread infringement upon “U.S. firms’ copyrights, trademarks, patents, and trade secrets in China. (The second report, a more quantitative analysis of the effect of IPR infringement on US jobs will come out in May 2011.) For metals companies doing business with China, this can certainly cause harm beyond simple exports the firm’s brand image, for example, or proprietary information, even if not explicitly shared, may become easily compromised. (Manufacturing equipment or processes are also targets.) As we’ve seen through the WikiLeaks cables, the Chinese have few qualms when it comes to hacking US corporations’ databases. Who’s to say this doesn’t extend into IPR?

Reuters intelligence in the Business Standard pointed to a recent report by PwC that said “the urgent need to protect intellectual property has forced 92 per cent of surveyed companies operating in China to plan budget increases on information security in the next 12 months. Chinese firms and the government have been under fire for either forcing companies to hand over patents and designs (or simply stealing them) when it comes to products such as high-speed trains, auto designs, mobile phones and wind turbines. The International Intellectual Property Alliance estimates US trade losses due to piracy in China of at least $3.5 billion in 2009, according to the article. For context, that is nearly the total value of the US aluminum extrusions market.

–Taras Berezowsky

The WTO Secretariat reported that the first half of 2010 saw a 29 percent decrease in anti-dumping initiations of investigations, as well as a sizable decrease in new measures applied, when compared to the same period in 2009.

With the spate of activity in dumping cases between China, the EU and the US since that time period, however, the decrease feels, well, moot.

India reported the most initiations with 17, the EU came in second with eight, while the US reported only two. India was also tops in reporting the applications of new measures with 17, the US came in with five, while the EU submitted two.  (The members to the Committee on Anti-Dumping Practices provide this data from their semi-annual reports.)

China is the top target once again for investigations, leading with 23 new initiations. Ahh, now that’s more like it.

The world’s second-largest economy is batting .500, to use a wholly American cliché, in its two highest-profile anti-dumping cases recently. The WTO rejected China’s claim against the US that the Obama administration’s tariff impositions on light vehicle tires violated rules. Nearly a week earlier, the WTO ruled in favor of the People’s Republic by striking down the EU’s policy to impose a 63% to 87% tariff on Chinese-made steel fasteners the first case China won against the EU.

What concerns us, however, is that industrial metals are still at the center of most cases (the base metals sector accounted for the greatest percentage of new initiations and new measures applied, according to the WTO report). The US imposed new duties on oil country tubular goods stainless alloy products used for drillpipe, casing pipe and tubular applications in the petrol industry and prestressed concrete steel wire strand from China in the first half of 2010. The USW has also taken the lead in pushing for investigation of Chinese imports of aluminum extrusion, Dustin Ensinger writes. According to the union, China controlled 8 percent of that market in 2007, which jumped to 20 percent in 2009. Over that same time, prices of the Chinese imports fell 30 to 50 percent. (Our own Stuart Burns analyzed what this means for the aluminum market back in November.)

With China’s economy growing proportionally much faster to that of the US, their government is ostensibly acting as though they can afford to get away with these types of practices. By taking advantage of the slumping western economy for their gain, they know that slaps on the wrist from the WTO will have minimal effect. It doesn’t look like China will forced to stop their rumbling econo-machine anytime soon; with pressure to feed demand both in their own domestic sphere, and in keeping up exports to meet internal quotas and fuel their GDP, the WTO at times seems nothing more than a minor roadblock.

–Taras Berezowsky

An intriguing if slightly scary article appeared on Mineweb last week, summarizing a number of earlier interviews and comments by gold market commentators and investment gurus concerning the degree to which gold on deposit in bank vaults actually exists. Or, as the article explains, doesn’t. Confusing? Yes, well, the situation is more than a little confusing, but I will try to explain.

Unlike paper money, which we have always accepted, does not physically sit in bank vaults — following your deposit, it’s instantly recycled into loans and payments by your bank. We have always understood that for those of us fortunate enough to hold physical gold (this author not included), when we deposit our precious bars in a bank’s vault for safekeeping, and the bank starts billing us for storage charges, that gold is sitting safe in their vaults for our eventual return. Secure and instantly available when we want it? Well, maybe not. Anecdotal evidence quoted by Jim Ricards, Snr. MD of Market Intelligence, and James Turk, founder of Gold Money, relayed stories of clients with physical gold and silver in Swiss banks who had to fight for one and two months, respectively, to secure the physical return of their gold and silver holdings. The conclusion in both cases: the banks were no longer holding the physical metal, even though they were continuing to charge the owner for storage.

The article also quotes GATA in saying it has long been known that the amount of gold and silver traded every day on the markets far exceeds the amount actually in existence, and that if everyone demanded simultaneous delivery it would be impossible. That should not come as any surprise; the same ounce can be bought and sold many times in a day representing dozens of ounces when in fact it is the same ounce going around. In addition, many trades are swaps, hedges and other transactions requiring financial delivery, not physical. Nevertheless, the point is probably a fair one that we trade gold and silver as if ever trade was physically backed, with no risk on non-delivery priced in and yet in most cases there is a counter-party risk which like a sub-prime mortgage gets passed around, until one day it doesn’t. As the volume of physical gold taken up by sovereign states like China and by physically backed funds like ETFs has rapidly risen in recent years, it raises doubts about how much metal is actually available for prompt delivery in the market place.

If these stories of bank non-delivery were isolated cases, they could be dismissed as exceptions. But Resourceinvestor ran an article by James Turk   providing empirical evidence supporting the view that we have already entered a period of severe and growing physical tightness in gold supply — and he points to the forward price curve to prove it. The London Bullion Market Association (LBMA) forward price curve is normally in contango, meaning the forward gold price is higher than the spot price. The difference is a reflection of the cost of finance and storage of gold for the intervening months. If the spot price is higher than the forward price, the market is said to be in backwardation and is usually the case if spot demand exceeds supply, creating pressure for buyers to pay excessive premiums to secure prompt delivery.

Source: Resource Investor

As these graphs show, both the gold and silver markets have been in backwardation. This degree of backwardation has not been seen since the LBMA databases started in 1989. The fact that 12-month gold is also trending towards backwardation shows the situation is intensifying, says James Turk.

The situation is even worse for silver, where six-month silver has been in backwardation since June 2.

Source: Resource Investor

The likely result, says the committed gold bull Mr. Turk, is rising prices and although we cannot see any justification for a further bull run on gold, we have to agree. One likely solution to a short-term shortage is higher prices forcing more recycling and demand destruction as jewelry and industrial use is hit. Whether that will be enough to counteract rising fund buying, though, remains to be seen. One thing is for sure: it looks like an unpleasant set of opposing forces playing out in the gold market and could be the harbinger of further volatility.

–Stuart Burns

We don’t really want to beat the whole ‘base metals ETF’ thing to death much more than the next guy (rare earths coverage, anyone?), but it seems fitting to do sort of a “wrap-up post on how last Friday’s opening of copper, tin and nickel ETPs by ETF Securities went. At least, we can gauge analysts’ reactions to the opening and their expectations for the 2011 aluminum, zinc and lead offerings.

Can the initial trading activity and sentiment tell us anything about the health of future base metal stocks and supply? With a couple trading days behind us, leaving the dust to settle a bit, here are some indicators and viewpoints on where prices especially those for copper are headed.

As a partial answer to a question I posed in my last post on this topic, Deutsche Bank said back in October that physically backed copper ETPs could hold 300,000 to 400,000 metric tons of metal, according to a Reuters article. “That compares with stocks of about 350,000 tonnes in London Metal Exchange warehouses now, the article continued. Meaning, the amount tied up in ETFs will about equal what’s now available, exacerbating the supply tightness rather than alleviating it.

“The next couple of weeks will be very interesting to see what the level of interest is, said David Wilson, analyst at Societe Generale, quoted in the article. “You do wonder if investors may wait until the bigger players’ products are launched. Two of those bigger players are JP Morgan and Black Rock Asset Management, whose ETP launches are reportedly in the works.

Copper is clearly hotter right now than the other two base metals. The nickel ETP was unchanged from the open, and the tin ETP was left untraded on Friday, according to Reuters. In a Q&A published by Reuters’ Metals Insider, Luvata’s head of metals for Europe and Asia, Ian Scarlett, expressed concern for copper especially. “We’re in a period in which availability is challenged, he said. “Anything that ties up physical metal and restricts end users from using copper is unhealthy.

Kevin Norrish, the managing director of commodities research at Barclays Capital, provides a helpful line of reasoning from the investors’ viewpoint in a Financial Times article:

“In current copper market conditions, investors get a return boost from the futures market as it has gone into backwardation, meaning new contracts cost less than expiring contracts. Investors buying into the physically backed product will not enjoy that uplift. It is a contradiction at the heart of the new products that their existence could lead to tighter market conditions, resulting in ongoing backwardation, to the benefit of investors in futures, Norrish says. On the other hand, if spot market prices go down, and futures markets go into contango (new contracts cost more than expiring ones), investors in physical products will still lose out because the cost of warehousing will go up (because the fee is per ton of metal).

Ultimately, Norrish says in the article: “You can’t argue that physical market investment doesn’t have an impact on price.

–Taras Berezowsky

There appears to be no respite in sight for global steel producers. While demand is recovering, raw material prices have risen and according to Credit Suisse – early and major players in the iron ore market – raw material prices are set to rise further. In a research report for investors, Credit Suisse outlined their reasons why they see the spot price moving decisively higher in 2011-12, potentially rivaling the previous highs seen in early 2008 and mid-2010.

Source: Bloomberg

Following a mid-year slump, Chinese steel production has recovered and is forecast to rise further in 2011 just as the slow recovery in Europe and North America gradually drives higher output in developed markets.

Source: Bloomberg

Part of the mid-year dip was due to over-production resulting in excess stocks, but Reuters puts Beijing’s campaign to meet 2010 energy efficiency targets (which resulted in reduced power supply to major industrial users) as the main contributory cause.

China in particular and Asia in general are the main drivers of the iron ore price because of their dominant position in the seaborne iron ore trade, yet China is not totally reliant on imported ore. The trend, though, appears to be that domestic grades have been falling; the bank estimates that compared to Australian and Brazilian 62% Fe content and Indian ore at 55-62% many domestic Chinese sources average no more than 30% and some are at 12%. Combined with rising wages, this has put the marginal cost of production for Chinese iron ore around US $150 per ton for 62% Fe equivalent.

As an alternative to the Big Two of Brazil and Australia, India has traditionally been a significant No. 3 supplier, but volumes are down this year following the Indian state of Karnataka’s ban on exports in late July, followed by a longer-than-usual monsoon hindering production and export shipments. At the same time, the domestic Indian market is consuming ever more of the domestic produced iron ore, a trend that will continue for the next decade or more.

Source: Bloomberg/Credit Suisse

Combined, these factors have pushed up prices in the spot market where much of India’s exports are sold.

The bank sees global steel production rising, saying seasonally adjusted production rose 3.5 percent in October. Supporting this view, Reuters said production was up in November by a further 2.4 percent over October and, quoting CISA, estimated production for the year would be up 8.2 percent over 2009. Credit Suisse expects both Brazil and Australia to remain supply constrained in 2011 such that while exports of iron ore may rise, it will be at a slower rate than steel production. In addition, the cost of production in both China and India is heading in only one direction, further limiting the opportunity for lower-cost material to replace Brazilian or Australian sources even if supply was sufficient, which it clearly appears not to be. In conclusion, the bank expects 62% Fe CFR iron ore prices to peak in Q1 at US $175 per ton before easing to $165 in Q2 and $150 for the second half of the year – China’s marginal cost of production effectively putting a floor under the spot price.

–Stuart Burns

After years of fruitless negotiations with other stainless steel producers, ArcelorMittal has decided to abandon attempts at a negotiated industry rationalization and has spun out their stainless division in a 1 for 20 rights issue to existing shareholders. In the words of a Bloomberg article, the industry, at least in Europe, has been beset with overcapacity and rising costs, producers have been losing money for years and ArcelorMittal’s decision follows that of competitor ThyssenKrupp AG, who abandoned plans for consolidation last year when it couldn’t get a favorable valuation.

As carbon steel mills return to profit, stainless mills are only just turning a corner. ArcelorMittal’s Inox stainless division, with plants in Belgium and Brazil, produced 1.59 million metric tons of steel in the first nine months of this year, resulting sales of $4.18 billion, or 6.8 percent of ArcelorMittal’s total revenue. The division reported a $219 million operating profit in the period. Last year, it posted a $172 million operating loss and lost $119 on every ton it produced. ThyssenKrupp’s stainless unit posted a 946 million euro ($1.2 billion) loss last year, the biggest among its divisions.

The problem for the stainless industry is its rising raw material costs cannot be passed on to consumers due to chronic over-capacity, which results in the mill firstly having to absorb cost increases and secondly unable to amortize its fixed costs over its full capacity. The market is ripe for consolidation, but if it cannot be done by negotiation it will have to be done by takeover and closure. One challenge is that of antitrust. According to a Reuters article, the largest global stainless producer Acerinox has an 11 percent market share in Europe versus 23 percent for Outokumpu. ThyssenKrupp, Germany’s biggest steelmaker, is also the biggest stainless steel player in Europe with 31 percent of the market, making it unlikely the company would be allowed to take on ArcelorMittal’s 22 percent. Acerinox looks the most likely, but they may struggle to find funding.

If not a European, then how about one of the rising stars of Asia? China’s mills, though a growing force in global steel production, are hardly household names, but China’s Taiyuan Iron & Steel Group Co. (said by Bloomberg to be the largest maker of stainless steel by 2009 output) is a possibility. Or Posco of South Korea, or maybe Taiwan’s Yieh United Steel Corp? In truth, though, who would want Inox? The “new company is valued at $2.8 billion but carries $1 billion of net debt. It is barely breaking even and operates in a market with far too much capacity. The probability is ArcelorMittal will have to nurse it along for a while longer before some form of consensus can be reached with European regulators, or shareholders will vote with their feet.

–Stuart Burns

I hope I am not alone in being hugely encouraged by a headline in the Financial Times stating “Xstrata steps up spending plans. It was not the fact that the miner was increasing spending, which comes as no surprise with metal prices back to near record highs; it was the fact they were increasing capital expenditure on their internal portfolio instead of the dubious spending sprees we have seen miners engage in over recent years, like the ludicrous prices paid for acquisitions like Alcan by Rio Tinto that left the latter on the verge of bankruptcy when the markets turned. Rio buying Alcan did not yield one ton more metal for the world, but Xstrata’s increase on capex from US $4.5 billion for 2011 and 2012 to $6.8 billion will result in increased metal availability in the years to come.

“Years to come” is, of course, the problem. Part of the reason we have record prices now for metals like copper is a result of under-investment in the 1990s and 2000s during times of low commodity prices (or when miners’ focus was on easy expansion by acquisition). Now the copper market is in deficit and, according to an FT article, is bracing itself for a 500,000 ton deficit next year — and that is before the impact of ETF Securities’ new physically backed copper, nickel and tin funds starting this Friday. Part of copper’s surge above $9,000 per ton this week is due to the expectation that ETFS’ copper fund will prove popular and, as a result, tie up LME physical metal that would otherwise be available for consumption.

A Telegraph article this week by Rowena Mason adds more detail to Xstrata’s focus on organic growth, saying the miner is the world’s biggest exporter of coal and the extra spend will primarily be on coal, copper and nickel projects. The firm singled out the Ravensworth North coal mine in Australia as the target of a $1.3 billion expansion plan. This mine is scheduled to start producing 8 million tons of coal from 2012. It is currently expanding about 20 mines across the globe and had already increased its capital expenditure program by $5 billion in August.

Nor is Xstrata alone: Rio Tinto is raising capital expenditure on internal assets from US $7 billion this year to US $11 billion next year, and like Xstrata expects to keep an elevated level of investment for some years to come. Even though miners are increasing spending now, this will not equate to increased metal availability for many years to come, in some cases up to 10-15 years into the future — such is the long term nature of major mining projects. So while it is encouraging to see miners commit hard cash to developing in-ground resources, it won’t save us in the short term from higher metal prices if the impending impact of continued emerging market demand collides with increased financial investment vehicles such as ETFs driving another bubble.

–Stuart Burns

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