The Hindu Business Line : Production cuts may help metal prices rebound

Mumbai, Dec. 5 With the US officially declaring economic recession, the worst seem not over for base metals such as copper, aluminium, zinc and lead. Prices have already halved and inventories at the London Metal Exchange (LME) are overflowing as there is no substantial improvement in off take. However, the recent production cut announced by the mining companies may push up in the short term.

Zinc scenario

Zinc prices on an average plunged 83 per cent to $1,242 a tonne in November from $2,278 in June on LME while inventory was up 40 per cent from 1.24 lakh tonnes (lt) to 1.73 lt.

Average aluminium prices on LME have dipped 28 per cent from $2,845 a tonne in June to $2,041 a tonne in November. Stockpiles at LME were up 49 per cent to 1.49 lt in November from 1 lt in June.

Suffers the most

Copper suffered the most with prices crashing 82 per cent to $4,465 a tonne in November from $8,126 a tonne in June on the back of sharp rise in inventory which double from 1.37 lt to 2.29 lt in November.

Lead prices also fell 81 per cent to $1,436 a tonne from $2,598 a tonne in June. However, inventories were marginally down from 56,813 tonnes to 53,754 tonnes in November as companies resorted to production cuts.

mothballing mines

Large miners such as OZ Minerals, Xstrata and other smaller miners are now mothballing mines which are operationally unsustainable at the current prices. More than 50 per cent of the global zinc smelting capacity incurring cash losses, said Mr Chirag Khasgiwala, research analyst, Emkay Global Financial Services.

The production cut may lead to marginal rise in prices, but the inventory in LME has gone up due to lack of demand. Despite production cuts, inventories are increasing last three months signalling a fall in consumption.

“The impact of production cut may impact prices at LME in the next few quarters as inventories at consumer end has exhausted and demand emerging,” he said.

SURPLUS

International Lead and Zinc Study Group has estimated a surplus of 1.50 lt of zinc supply in 2008 and 3.30 lt surplus in 2009. Closure of mines in the recent past may lead to a drop in surplus situation in 2009.

Copper TC/RC (treatment and refining charges) may remain under pressure with the closure of several mines. “TC/RC may move down as mine closures force increase in copper concentrate deficits,” said Mr Khasgiwala.

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