After a year in the smelter, where are industrial metals headed?

Producers of industrial metals started 2011 on an upbeat note, but the optimism fizzled out mid-year.

Copper producers expected rates to be buoyant as supply and demand were fairly tight. Iron ore miners were upbeat as steel producers were on a comeback trail. Aluminium and zinc makers were in a cautious albeit jolly mood when it came to volumes and prices. But it all went awry.

The S&P TSX global mining index was down 26 per cent in 2011. Prices of most ferrous and non-ferrous goods ended south of where they started. We take a look at the major industrial metals and how they fared.

Copper

Global copper prices have corrected close to 23 per cent this year on the London Metal Exchange. After tight supplies (dwindling grade of ore, production outages and limited new mines) which drove prices to record-highs in 2010, uncertain global economic conditions pushed copper prices lower this year. The International Copper Study Group estimates that demand and supply of refined copper remained matched through 2011; a situation expected to continue into 2012 given regular disruptions to supply in 2011 and lacklustre pace of mine additions. Global copper consumption growth also moderated from 7 per cent in 2010 to 1.5 per cent in 2011.

Manganese

Manganese prices have softened by over 40 per cent so far this year, making it the worst performing metal of the year. A glut of supply from South Africa and Indonesia had put tremendous pressure on global prices in 2011. India's largest manganese producer MOIL was reported to be seeking a hike in import duties on manganese to find support for domestic manganese prices. With prices fast approaching levels where mines across China and South Africa are pushed into red, mine shutdowns and deferred investments could be on the cards. This could eventually provide support to prices.

Iron ore

Iron ore prices witnessed a crash of 22 per cent, much of it coming in the latter part of the year, as the European crisis threatened to push steel-makers in the continent into a long period of anaemic growth. China's on-today-off tomorrow raw material demand did not help the cause of iron ore prices either. A ban on exports and crack-down on illegal mining domestically crimped iron ore output sharply. This led to higher iron ore prices domestically. With a fairly consolidated supplier base, iron ore is likely to remain a more stable asset among industrial metals.

Zinc and Lead

Zinc and lead are expected to turn in consumption growth rates of two and six per cent respectively in 2011. Their prices took a beating of over 24 per cent each. Sedate global steel demand played spoil sport with zinc while dodgy auto sales hit lead demand.  Both metals saw supply exceed demand due to high refining capacity coming on stream. However the International Lead and Zinc Study Group expect sedate capacity additions in 2012. This may help narrow the surpluses. Reports indicate that large swathes of Chinese zinc producers are now making losses.

Aluminium

Contrary to all expectations, aluminium was the best performing industrial metal of 2011 having shed just over 19 per cent through 2011. This is due to a seven per cent increase in demand for aluminium this year. However, aluminium prices have been among the most sedate performers over the last two years and the drop has left Chinese producers gasping and European smelters slipping slowly into the red in terms of profits. Here again, an excess of smelter capacity, zigzagging demand and fairly sizable global inventory pile, may cap gains.

Themes for 2012

What's in store for 2012? Aluminium, zinc, lead and manganese producers are in need of a good old fashioned shoot-out where high-cost producers may need to idle capacity or modernise plants, either may take some time. Question is will this be enforced by plunging prices or greater producer discipline? Iron ore on the other hand is a fairly consolidated business with the top three producers (BHP Billiton, Rio Tinto and Vale) endowed with cash, large reserves and pricing power. A quality-ore deficient China, too, should hold up demand and prices for iron ore. Similarly, copper processors hold the upper hand given the lack of quality capacity additions over the last few years. They remain firmly in the driver's seat on prices.

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