Swamped with stocks

A slipping Chinese PMI, lower than expected manufacturing growth data from the US and India, 3.7 per cent drop in Japanese quarterly GDP and continued sluggish pace of growth from Europe were some of the news which greeted investors at the start of June 2011. Despite what could be construed as a challenging set of conditions for miners globally, contract and spot prices of several metals have held up surprisingly well after witnessing a sharp correction in early-May. The big question and often a multi-million dollar question is — will they stay that way, or are we in for a repeat of last summer's dismal price performance?

COPPER

After posting strong gains of 30 per cent through 2010, global copper prices have so far had a flat 2011. Copper consumption in 2010 had risen by 7 per cent to around 19 million tonnes over the previous calendar. The International Copper Study Group estimated that demand had exceeded supply by 300,000 tonnes in the last calendar year.

Besides, there were other factors that kept copper prices buoyant last year. The grade and quantity of ore from mines in Chile, Peru and the US have been dwindling with few significant mine additions over the last decade. This has constrained supply of copper concentrate. These countries accounted for under half of the 2010 copper mine output of 16 million tonnes. Mines in these regions are said to have ‘peaked'. With funding for mine additions hard to come-by, demand is expected to outpace supply with booming Asian economies, barring Indonesia, having few mines to boast of. Add to this, the progressively higher cost of digging deeper into the ground to mine copper are proving to be major challenges to copper mine additions globally.

A surfeit of global smelter capacity chasing the dwindling supply of copper mine output is another factor that contributed to strong copper demand. Smelters process copper concentrate which miners provide for a fixed negotiated charge known as TcRc (copper concentrate refining and treatment charge). Hindalco and Sterlite that own two of India's largest copper smelters, import ore from Chile, Australia and process them into copper cathodes which are then utilised for application in industrial and construction segments. Both the companies saw TcRc charges remain flat relative to sales growth between FY2010 and FY2011.

Despite these supportive factors, concerns over sustained global economic recovery and the March-quake that dealt a blow to the world's second largest copper smelting nation, Japan, has pegged back prices of base metals. Copper too corrected about 10 per cent over the last two months. There have been questions over the exact magnitude of inventory in China, where speculative demand for copper has slowed down over the last three months.

Another concern appears to be that of rising copper inventory levels. LME copper inventory levels have reached one-year highs on the back of increased investment and speculative demand for the metal. However, Indian demand for copper cathodes is expected to keep pace with global growth to the tune of 7-8 per cent over the next two years. This bodes well for processors such as Hindalco and Sterlite who have reportedly negotiated better TcRc rates for the second half of CY-2011.

ZINC

Global zinc prices are up 22 per cent over the last year. Zinc production was also up 12 per cent to 12.5 million tonnes in 2010. The lustrous metal has however faced challenging times in 2011 as prices slipped by around 9 per cent. These were on the back of concerns that supply from new smelting capacity in China and India may exceed the pace of demand growth from steel producers. International Lead and Zinc Study Group estimates new mine additions to add 9 per cent to current output, which is 3 percentage points higher than expected global demand growth during the same period. This may not bode well for zinc miners on two levels: First, the obvious demand-supply mismatch. Zinc inventories are at the most worrisome levels of around 850,000 tonnes, which is a multi-decade high.

The Indian zinc market, whose size is estimated at around half a million tonnes, is dominated by Sterlite Industries-controlled Hindustan Zinc, with 80 per cent market share.

Hindustan Zinc's primary growth drivers include the growing flat-steel segment a portion of which includes galvanized coils. Both these segments are expected to grow at a healthy clip and are expected to drive demand for of steel by around 15 per cent a year. While zinc prices may see some pressure over the next year due to supply overhang, Hindustan Zinc's quality reserves and buoyant domestic market are good defences against volatility.

MANGANESE

Like zinc, manganese finds majority of its application as an input for steel production. However manganese, unlike zinc, is not traded on a major exchange. Here again, Chinese inventory stock-piles have played spoilsport with global prices.

Reports indicate that Chinese ports are holding four million tonnes of manganese inventory. This quantity would roughly account for a tenth of the 2010 global manganese ore output of 40 million tonnes.

Global manganese prices and demand generally track those of steel, with manganese consumed in the form of ferro-alloys. Global prices of manganese ore are down by between 20-25 per cent as consumer ferro-manganese and silico-manganese markets remain weak.

Adding to woes are indications of an oversupplied market: Six of the top seven manganese producers globally saw output rise by 53 per cent through 2010 compared with 2009.

With supply far outpacing demand, realisations have remained under pressure from late-2010 till date. This situation when coupled with high global inventory levels could result in continued weak pricing power.

India's largest manganese producer,MOIL is the only pure-play exposure in the space with high quality reserves and a huge cash-pile. The company may have a chance to snap up manganese mines abroad for cheap in the event of sustained depressed manganese prices.

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