Market Analysis

Lead, along with zinc have not been as much in the news of late and while prices rose this month along with the whole base metals complex on a weaker dollar, the heavy metal has been very much in the shade of copper and tin. News late this week of a Chinese smelter closure gave a boost to prices and something of a shock to the market as record Chinese production numbers in September were announced around the same time. The smelter in question is Zhongjin Lingnan’s Shaoguan lead and zinc smelter in Guangdong province according to a Standard Bank note to clients, and although details appear uncertain the belief is the smelter has been closed due to excessive levels of thallium – a highly toxic metal – in the Beijing River. The smelter has a capacity of around 270 ktpy of zinc and 115 ktpy of lead, accounting for around 5.5% and 3% of Chinese production respectively according to Leon Westgate at Standard Bank.

At the same time, Reuters is quoting data from the National Bureau of Statistics that state lead production reached 421,000 tons in September, up 4.2% on the previous record in August and 19.3% from the same month a year last year. Chinese year to date output is over 3 million tons, up 4.5% over the same period in 2009. The increased production is due to improved concentrate supplies and smelters coming back after maintenance close-downs and refurbishments extending capacity.

So what does this increased production mean for the global lead market? Can we expect prices to fall as a result of improved supply? Well first, although China is the world’s largest lead producer, accounting for over 40% of global production according to Credit Suisse and Brook Hunt, it has not been a lead exporter since about 2008 and is unlikely to be with Beijing’s focus on energy use and environmental impact. By the application of export taxes and similar incentives, Beijing will ensure China remains neutral or a small net importer of refined metal. China is however a major importer of concentrate, imports of which have suddenly surged again after several months of decline while Chinese consumers run down stocks.

There is some softening in the demand outlook for refined lead however. 80% of lead is used in the battery industry and 57% in autos. China’s growth in vehicle production has been slowing since April and Credit Suisse notes utilization rates at e-bike manufacturers has fallen since the beginning of this year. Auto manufacture in OECD markets has remained more robust than many expected when stimulus support was removed but still cannot be said to be strong. Stimulus support for car buyers has just been withdrawn in China and evidence in Europe suggests this will result in a sharp slowdown in vehicle sales. Replacement battery sales will continue and increasingly become a major component of the market as those cars and e-bikes require replacements.

Lead concentrate supply is a mixed picture. In China, mine supply has surprised on the upside this year but over the medium term production could decline as the government seeks to consolidate the highly fragmented industry for environmental, safety and energy consumption reasons. Globally supply is more than adequate at the moment but towards the middle of the decade large mines in Australia and Canada will be at the end of their lives and at present there is nothing to take their place.

Source: Credit Suisse

The following table taken from Credit Suisse data summarizes the current and go forward position for consumption, refined lead balance, stocks (LME) and price. We include the reference to the LME in brackets because producers and consumers also hold significant inventory. Last year for example when the LME averaged some 147kt, producers held an estimated 135kt and consumers a further 106kt. But it is fair to say if either got seriously out of balance with the other the LME would be the bell-weather displaying the underlying state of the market.

There is considerable uncertainty about many of these estimates. Domestic Chinese mine production has a significant +/- to it, as does demand from automotive and e-bike batteries. There could well be a softening in demand in Q4, 2010 and Q1, 2011 as demand eases in China and western markets remain flat. Current prices probably already factor in much of the upside for the first half of 2011 but as H2 2011 unfolds, a growing tightness should unleash further speculative buying that will be needed to justify mine expansion in the years ahead.

–Stuart Burns

MetalMiner is pleased to welcome our newest commentator, Taras Berezowsky.

China steel prices appear to be on an upswing at third quarter’s end, but going into Q4, there is still much uncertainty about exactly where prices will be by the end of 2010.

Based on MetalMiner’s latest IndX, as of October 1, most metal types experienced a slight increase [see below]. For example, rebar was up nearly 8 percent from September 1.

Source: MetalMiner IndX(SM)

The slight increases do not necessarily indicate that prices in China, and by extension, much of Asia, are less affected than those in the U.S. As MetalMiner makes clear in its Q3 report, “the US market does have more price protection for raw materials than either Asian or European steel markets.

Though US steel price momentum remains uncertain, China may head toward a slightly different trajectory. News lately has focused on China’s crackdown on oversupply. By shutting down several mills entirely (though temporarily), and decreasing steel production overall by 70 percent, the move was seen as necessary to spur future demand in the Asian market. Now, according to sources, production looks to be restarting.

The Steel Index reports that spot iron ore prices reached $151/ton for 62% Fe fines. Prices have increased 11.5% over the past four weeks.

In a recent Reuters article, Manolo Serapio, Jr., writes that [Australian bank] ANZ said reports that China may be easing power curbs on steel mills “sets the scene for a boost in positive sentiment¦

Raw materials prices, especially iron ore, will no doubt be the primary drivers for increased steel prices. However, China, the biggest iron ore buyer in the world, will encounter market volatility here, as evidenced by the recent iron ore conference in Dalian.

Ian Christmas, the World Steel Association’s director general, quoted by Reuters at a news conference in Tokyo, sees uncertainty here as well. “There is no doubt a very short-term volatility in steel prices coming from raw material prices gives us and customers some issues, he said.

Global steel demand may just be the most important indicator. Demand is set to rise 13.1 percent to 1.27 billion tons this year, higher than an earlier forecast of 8.4 percent growth, according to the Oct. 4 Reuters report. Even Ukraine, the world’s eighth-largest steel producer, has seen sizable increases in crude steel output this year, with 33.5 million tons projected for 2010.

“We are in a transitional period: emerging economies like China, India, Latin American countries and Russia are bolstering their shares in steel output and consumption while demand in developed economies remains in the doldrums,” said Hajime Bada, president of the world’s No. 5 steelmaker, JFE Holdings Inc.

As long as demand in nations such as India stay strong, domestic consumption remains hearty the IMF projects 10.5 percent growth in 2011 and the real estate market is kept under control, China’s steel prices should stay steady.

–Taras Berezowsky

For every action there is an equal and opposite reaction, so said Newton when developing his laws of motion. But he could have been speaking about economics (although it is doubtful the great man would have dabbled in such an inexact science). As the Fed ponders the use of further Quantitative Easing (QE2) on top of the $1.7 trillion it has already pumped into the economy spare a thought for the Asian economies, already experiencing rising currencies hitting their export industries and now facing the multiple challenges of massive capital inflows, rising commodity prices and their biggest market China neatly pegged to the falling dollar.

The Asian and some other emerging economies have seen massive capital inflows over the last year and expect the trend to accelerate if more QE is enacted. According to a FT article, net private capital flows to emerging Asia are forecast to reach more than $270bn in 2010 and as much again in 2011, according to the Institute of International Finance. The World Bank and IMF are getting alarmed. Inflows of capital are posing a growing risk to East Asian macro-economic stability, according to the World Bank’s half-yearly review of regional trends quoted in an FT article.

This chart illustrates the scale of the capital flows following the last round of QE. The fear is further easy money will flood towards higher earning Asian markets and create a new Asian crisis similar to the late 1990’s. The inflows of hot money have the effect of driving up the currency. Even the Koran Won which is the only Asian currency still below the US dollar since the onset of the financial crisis rose by 7.6% over the last 3 months and the Korean central bank is spending US$1bn a day to try and keep it down. The Malaysian Ringgit has risen 11% already this year. The Thai Baht has risen 12% and the Japanese Yen 30%.

The incoming funds then look for a home, generally highly liquid assets such as bonds and equities, driving up the local stock market and inflating prices.

UBS believes further QE will result in a boost in commodity prices as a wall of money comes looking for assets as a hedge against a falling dollar and future inflation risks. The impact of that will be to increase inflationary pressures at the factory gate as many Asian economies import raw materials to export finished goods.

Emerging markets have started to impose controls to try to stem the tide. Brazil recently doubled the tax on foreign investment in government bonds and Thailand has imposed a 15% capital gains and interest payments tax on government and state owned company bonds. South Korea has held off so far because they are in the chair for the upcoming G20 summit in Seoul but if a consensus to act in a collaborative manner cannot be found at the summit expect Seoul to implement its own measures after the rest go home.

Capital controls are not a long-term solution. Kristin Forbes at the Massachusetts Institute of Technology is quoted in an FT article saying that evidence from previous experiments with controls is mixed, with no significant impact on the volume of capital inflows or currency appreciation. Controls often hit small and medium-sized companies harder than big ones, and can therefore have serious implications for productivity and growth in countries that rely heavily on SMEs, as many emerging Asian nations do.

A rising currency may be the only answer.

–Stuart Burns

A recent Standard Bank note to clients reviewed price movements in the thermal coal market and noted prices rose for delivery into Antwerp-Rotterdam-Amsterdam (ARA), reaching US$98.90/metric ton. ARA is the traditional European benchmark price across the principal import points   for imported coal. In the same way that these ports have become the benchmark for Europe, China has become the benchmark for Asia, Mike Henry BHP Billiton president for marketing is quoted as saying in Business Report.   By comparison FOB prices from South Africa’s Richard’s Bay reached US$90 per metric ton.

Standard Bank put thermal coal’s strength down to two factors. First, investor demand across the energy complex which has been lifted by rising crude oil prices.

Second and we would suggest more of an impact –   is growing emerging market demand. The note makes the point that China consumes 43% of global thermal coal and that the wider emerging markets consume some two thirds of global thermal coal.

HSBC in their last quarterly Metals & Mining report looks at projections of thermal coal imports forward to 2013 by which time India, already a major thermal coal consumer will be importing as much as China. China is doing much more to diversify its energy sources than India yet the latter is seeing energy demand grow at breakneck speed. Both countries will be at around 100 million tons of imports per annum, not far behind leader Japan at 123 million. Interestingly in this world of growing renewable energy sources, rising environmental concerns and much cheaper natural gas prices following the opening up of shale gas, BP’s annual energy review points out the largest generating energy source last year remains coal at 29.4%. Ironically due to a global retrenchment in energy growth following the recession of 2009 saw the highest proportion coming from coal since 1970. That anomaly is unlikely to continue with so much money pouring into other energy sources but for many emerging markets coal will remain the major energy source for a long time to come and their rising demand will support prices. Standard Bank is expecting 2011 to average US$95/ton but with a gradually rising trend during the second half of next year to $100 per ton FOB Richards Bay, South Africa.

–Stuart Burns

China must feel like its damned if it does and damned if it doesn’t. What are we talking about? – green technologies and environmental responsibility. Five years ago in the last plan, China committed to reducing the country’s energy intensity the energy consumed per unit of output by 20% according to a FT report. The target looks unlikely to be achieved, but even so China came under considerable criticism at the time because it was not seeking to cut outright emissions, only the intensity.

These two graphs from the FT illustrate the problem vividly. China has been growing strongly since 2000, but so has energy use even as energy intensity has been falling. To be fair, when the economy is growing at 10%+ per year how can you realistically aim to cut outright emissions five years into the future when the level of economic activity will be not be far off of double what it is today?

This year as the five year plan comes to a close, Beijing has been pulling levers all over the economy in a last minute attempt to meet the targets. If they claim to have done so it will be a farce. Although China’s energy intensity fell by 15.6% from 2005 to 2009 it rose by 3.2% in the first quarter of this year and the biggest culprits are the protected state industrial enterprises that consume 70% of the energy and generate 70% of the emissions. Local officials have been playing high profile lip service to the cut backs in energy supply, extending enforcement to the extremes of imposing a five days open, ten days closed regime on small private enterprises in Zhejiang province, but largely turning a blind eye to major enterprises from where the provincial revenues flow and who are the major local employers. Much fuss and bother was made about cutting power to aluminum smelters but production has barely been affected suggesting smelters have found ways around the headline announcements.

At the same time as trying to cut energy intensity, China has been trying develop a domestic green energy industry to roll out emission free technologies for power generation in the future. But the United Steelworkers fear subsidies given to the wind turbine and solar industries are going to create a global competitor to domestic US equipment manufacturers and have petitioned an investigation in to whether such subsidies are against WTO rules. The probe extends beyond just wind and solar to include support for advanced batteries and energy efficient vehicles. One can’t help but wonder how the US will be able to pursue this case with a straight face when they have poured billions into support for the same industries back home – a point that was not lost on an indignant Zhang Guobao, China’s top energy official according to the FT when he recently defended his country’s conduct saying the US spent $4.6bn in the first nine months of this year in subsidies to new energy enterprises. Most accept the current criticism has more to do with mid term elections than anything else.

Nevertheless even China could admit it has a monumental challenge ahead of it. Energy use will continue to grow with the economy and yet the environmental impact and cost to import energy products are both huge.   Indeed energy efficiency and environmental impact may be China’s biggest challenge in the next five year plan.

–Stuart Burns

Though I have yet to see the full merger if you will of social media outlets such as Facebook meld into the b2b world of metals or economics, I sense a growing appetite on personal pages to share articles and news items directly involving politics and economics. A friend of mine who owns a very successful soup and icy retail business here in Chicago recently joined us for lunch. A day later, he sent me a link   to this video asking for my thoughts.


Ordinarily, I would have responded with a “he’s nuts trying to make a buck on going rogue (perhaps I should say contrarian?). But I found myself responding slightly differently. Instead of a “he’s nuts/fringe/lunatic etc I said, “I wouldn’t weight his predictions very heavily but I caught myself not passing judgment regarding the man’s mental health. And the reason for that involves a number of data points that we examine on a regular basis.

What are some of those data points? To start, we follow a blog called Zero Hedge. As a disclaimer, we believe this site operates on the fringe (the main authors all have pseudo-names referencing Fight Club characters) but what I call the “intellectual fringe. As their tagline reads, Zero Hedge On a long enough timeline the survival rate for everyone drops to zero and so despite their rather mysterious identities (they are likely ex Wall Street traders, hedge fund traders, investment bankers, research analysts etc) their body of work appears intellectually sound, interesting and definitely controversial. Check out this post with the title: Guest Post: Is America on a Burning Platform? Except the guest post didn’t get written by “Tyler Durden instead, it came from David Walker, the former Comptroller of the United States from 1998 until 2008. We would highly recommend that anyone with even a slight interest in economics review this piece. Zero Hedge publishes dozens of articles of a similar vein and quality.

Next we turn to our friends at the Consumer Metrics Institute. Founder Rick Davis, whom we often quote, has admitted in a recent report that many believe he and his data represent the lunatic/delusional fringe. The Consumer Metrics Institute uses real-time economic data taken from the Internet and accurately called the 2008 recession as well as the first to see Ëœgreen shoots’ from the economic stimulus programs of 2009. But their data continues to tell a grim story about the state of the US economy. The length of the current economic downtrend is “already 97% as bad as in 2008 and the 2010 contraction has lasted 24% longer than the entire 2008 event without yet starting to recover. The chart below outlines this visually:

Quantitative easing (e.g. the printing of money) in the hopes of spurring inflation represents yet another sign that our fearless leaders have also read similar economic tea leaves. Do we need to stock up on rations and guns we’d consider that premature but we’re having a hard time swallowing an economic recovery in any form any time soon.

–Lisa Reisman

The fact is its kind of hard to tell. If you look at their Q2 Financial results they present the data as if they are making US$76 per ton of steel, see table from their recent results:

The Sales, EBITDA and Operating Income are presumably taken on the total sales turnover of the group. Yet the same table shows iron ore production at 16.4 million tons in Q2. At current prices of some $140/ton that is $2.3bn, comparatively small beer compared to the quarter’s sales of $21.6bn but significant when looked at from the point of view of net income. Most iron ore assets have a cost of production still in the realms of the long-term iron ore contract prices of the last decade. For example Fortescue Metals, Australia’s newest major iron ore producer is reported in Business Week as having a cost of production just under $35/ton, and even that is significantly higher than the previous quarter due to the strength of the Australian dollar. Iron ore spot prices this year peaked at $180/ton and Fortescue reported an average 2010 price of $125/ton. Taking these real life numbers that suggests a crude $90/ton delta. 16.4 million tons of iron ore at a $90/ton margin is $1476m contribution to the net income. With net income for the quarter only showing $1704m that suggests nearly 90% of ArcelorMittal’s net profits come from iron ore.

Worse with the first half net income only $2383m and iron ore sales of 32.2m tons it suggests steel making ran at a loss of half a billion dollars. It raises the question is ArcelorMittal more of a mining company than a steel company? In terms of activity clearly not, but in terms of earnings per share yes it probably is. At the very least it is misleading to state income per ton of steel produced. The income on one ton of steel is way below the figures quoted.

Now we know AM are not using all the iron ore in their own steel making plants, they actively sell iron ore to third parties. Even if they were consuming all the iron ore in their own operations they would still be enjoying this huge delta between cost and market and their steel net income results should reflect this, but they don’t. At $76/ton income per ton of steel produced is below the delta achieved on the iron ore. It makes one wonder if it wasn’t for the iron ore would AM even be viable?

Maybe a more actuarially minded reader may like to run their slide rule over the numbers and tell me if I am out. The best we can do is run a comparison against competitors. US Steel is a smaller but similarly integrated steel producer currently running a loss of $25m in the second quarter according to Daily Finance even though sales more than doubled from the first quarter to $4.68bn according to the WSJ. The loss is the sixth consecutive quarterly loss for US Steel but to be fair, the WSJ makes the point that the firm has been a laggard compared to it’s peers so may be they are not an ideal comparison for the more multinational ArcelorMittal.

An FT article covers ThyssenKrupp, Germany’s largest steel maker who turned previous losses into a second quarter (their fiscal Q3) profit of $420m on sales of $16bn, but then again Thyssen is a very diversified group involved in many downstream manufacturing and engineering enterprises. However Germany’s economy has been flying this year, led by engineering and manufacturing, just the categories Thyssen’s downstream operations are involved in. One would expect Thyssen’s net profit as a percentage of sales to be higher than under-utilized steel producer ArcelorMittal, but no, AM’s return is three times Thyssen’s at 2.6% as opposed to 7.9%. We suspect therefore that AM’s results are flattered by profits on iron ore rather than the way they are presented from steel production.

–Stuart Burns

We may be excused for thinking the move by miners and the Asian steel majors from annual iron ore contracts to quarterly and finally to spot (or largely to spot we have various permutations all being used at present but that’s the direction) will be the end of the iron ore pricing story, but in fact it’s just the beginning. The acceptance by CISA and the steel mills of spot pricing is moving in tandem with those same mills imposing spot pricing on their customers, essentially allowing them to pass through cost increases to their clients. For the first time in 40 years, Posco broke its annual price tariff and started adjusting prices quarterly in response to iron ore costs. We wrote last week about JFE’s evident surprise that their clients had so readily accepted a move to spot pricing, and they are not alone. While Chinese steel mills have always sold a large proportion of their material on essentially a spot basis, mills in other parts of SE Asia and in Europe have tended to adjust prices much more gradually – annual fixed prices being the norm and even longer for major consumers like automotive and consumer goods manufacturers. The semi annual adjustments that European majors like ThyssenKrupp, ArcelorMittal and Voest Alpine have imposed this year are the first step in a trend of more and more short term pricing that will manifest itself over the coming months.

You would expect howls of protest from major steel consumers and warnings that the price of a car or a washing machine are going to have to fluctuate with the iron ore market, but in fact apart from some bleating from manufacturers associations there has been a surprisingly muted response. Talking to market insiders it becomes apparent that major steel consumers are already hard at work developing hedging strategies to offset their supply price risk. Steel consumers face several closely related risks. The first is a simple agreement to index price rises and falls. If a supplier moves from annual to spot pricing, an index or benchmark is needed for agreement on prices changes, both as the price rises and to ensure fair reductions are made as index prices fall. The second risk is for the steel consumer to hedge that risk forward, ensuring a net cost balance going forward. If an automotive supplier enters into an agreement to sell steel panels to an OEM at a set price he needs to ensure his cost are controlled over the life of that pricing agreement. Over the counter iron ore swaps cleared via LCH Clearnet and SGX AsiaClear provide financial settlement of forward dated derivatives allowing consumers to essentially cover the price of steel inputs forward and more importantly by buying to an agreed index hold their suppliers accountable to price falls as well as price rises. The crucial issue here is to have the supply chain accountable to the same metric, by aligning price movements between the miner, steel mill and consumer to the same index, to hedge and reduce cost volatility.

Not surprisingly the leading players in this field like Credit Suisse are already working with major consumers such as automotive, construction and consumer durables to develop such techniques in Europe. The US is lagging behind the curve partly it seems because the integrated steel producers are more vertically integrated than Asia or European mills and therefore feel themselves less pressured to move to spot pricing, partly because scrap based EAF steel producers play such a dominant role in the US market and of course they are driven by a different set of pricing dynamics. Sooner or later however, the US will likely trend toward shorter term pricing even for major end users and ultimately hedging will become a necessity for downstream steel consumers. The interest in the Nymex MW HR coil contract when it was launched was an indication that consumers are keen for mechanisms to achieve price stability. Maybe for larger players taking one step back up the supply chain to iron ore is the way to go.

–Stuart Burns

LME Week is always a great time for headlines, either announcing new projects, major players’ transactions or, what the LME loves best, market rumors! Well, a Reuters report this week covered the comments made by the veteran market trader David Threlkeld, president of metals trader Resolved Inc., regarding unreported stockpiles of copper on the world market. Or rather, not on the market but hidden from the market, because if Mr. Threlkeld is correct (and not just over-imbibing on broker hospitality) the copper market could head in exactly the opposite direction that everyone else is expecting.

Not that David Threlkeld’s comments should be dismissed lightly. As the report points out, he helped blow the whistle on the $2.6 billion Sumitomo copper scandal in the 1990s, but you have to wonder where he gets his current data.

To quote his comments in Reuters: “We ran a (copper) surplus last year … an actual production surplus. We are going to run another production surplus this year because of the deliberate rewriting of statistics to turn a surplus market into what appears to be a deficit market.” In Mr Threlkeld’s opinion, there are more than 2 million tons of unreported stocks held off warrant in warehouses where they lie unreported, most notably in China where he believes up to 2 million tons could be held.

Source: Reuters

Visible global stocks have been on a downward trend since the beginning of this year as this graph shows and while there has been Chinese growth in demand this year and a return to OECD market growth, it is difficult to judge if that level of draw-down in visible inventory is entirely due to consumption or (as with some aluminum) a move to cheaper off-market warehousing.

Source: Reuters

It should be possible to estimate China’s imports — the country imports some 80 percent of its total copper requirement, according to a Reuters video interview with Andrew Driscoll, head of CLSA’s Asia research. Add to that its domestic refined metal production to arrive at a figure to compare against its finished metal consumption, any unaccounted difference could very possibly be stocks if one could believe the figures, and therein lies the problem. The copper market was in surplus last year to some 770,000 tons according to GFMS (reported in BusinessWeek) and although China’s demand growth has been in excess of 6%pa and demand has picked up in other emerging markets, has it exceeded the surplus? Admittedly there is little precise data to reliably say the draw-down on stocks is purely for end-user consumption. The LME SHFE arbitrage window, a common driver of Chinese speculative imports, has been closed for some months yet imports have continued suggesting they represent solid end-user demand.

For the time being, most of the rest of the market is extremely bullish on copper prices, believing the market to be in deficit and the supply market destined over the medium term to get tighter as mine depletion leads to reduced supply and rising prices. Who’s right remains to be seen, but without some reliable data, for a change, we are more inclined to follow the herd.

We’re interested in what copper trends you are seeing in the market. Take our brief 4 question MetalMiner Copper Pulse survey and we’ll report back the results on Friday.


–Stuart Burns

We are used to hearing divergent views on metal prices, but rarely can well respected sources differ as much as we are currently hearing in the silver market. Quoted in a Telegraph article, James Turk, who founded bullion dealer GoldMoney in 2001 and is said to manage $1.2 billion of assets, thinks prices could hit $50 by the end of next year. Mr. Turk believes quantitative easing will devalue currencies and send precious metals much higher. He uses the traditional gold-silver ratio to illustrate that silver is undervalued at current prices. Simply put, the gold-silver ratio is the number of ounces of silver it takes to buy one ounce of gold. With silver currently at about $22.10/ounce and gold at $1316.25, the ratio stands at 59.56. According to Mr. Turk, in 1970 it was 20, it peaked at just under 100 in 1970 and the average is about 40, but in February 2010 it was as high as 72 when gold was high and silver exceptionally low, now it is headed back to its long-term average.

So much for the bulls; what of the bears? Well, Suki Cooper, a precious metals analyst at Barclays Capital takes a much more measured tack. While not bearish, she has an average target for silver next year of $22.20, expecting the metal to peak in the second quarter at an average price of $23.70. Silver is still in surplus, but it has benefited from safe haven buying, she is quoted as saying, meaning it has benefited this year, but don’t expect it to continue unabated.

As an Economist article points out, silver not only offers opportunities for investors keen for a safe haven, but it also offers diversity as an industrial metal. Whereas investors buy around 25-30 percent of gold, only about a tenth of global silver production goes the same way. Roughly half the world’s silver goes to industrial uses, particularly electronics and in photovoltaic cells. Demand is likely to continue to increase as economic activity recovers, particularly in Asia as where so much of the world’s electronics originate. In addition, supply, while not tight, is at least constrained by the fact that 75 percent of the world’s supply of silver comes as a by-product of copper, lead and zinc mining. So ramping up production is dependent on the economics of those metals before silver.

Having said the above, investor interest in silver, the main driver of current price strength may be waning. Ms. Cooper states in the Telegraph that in the current year to date investment inflows into silver have amounted to 1,377 tons, compared to the nine-months to September 2009 when it was 2,942 tons. It could be fear of a slowing in global growth over the next 12 months will mean industrial demand for silver will flatten out and with it investor appetite, even with quantitative easing to keep investors jittery there are no shortage of gold opportunities around for those looking for a “safe haven. The silver market has been, and remains, in surplus.

Source: Bloomberg

As ETF securities advised in a recent presentation to investors, Mr. Turk’s gold-silver ratio has been to the north of the 50-year average (they use 50 against the Telegraph’s average 60) for much of the last 15 years. Maybe the normal level for silver is in fact closer to the current ratio of 60, and to hearken back to an average with prices in the 1970s and 80s is misleading.

We do not pretend to have a crystal ball on the silver market, but if we had to put our hard-earned cash on the future price direction, we would suggest a large measure of volatility around current levels sounds more likely than any dramatic extension of the current bull run. Silver is not gold, and mine supply and industrial demand still play a significant role in setting the price.

–Stuart Burns

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