MINING CHRONICLE, March 1999
Commodities crisis to bite harder
By Brian Jenkins
The catastrophic effects of falling commodity prices on BHP, MIM, Pasminco and WMC may be but the early signs of a probing test of competitiveness which will continue for several years as Asian trading partners continue to tighten their belts against imports.
The Australian Bureau of Agricultural and Resource Economics (ABARE) has estimated that national mineral/exploration spending is to fall 30% this year. The world downturn of prices and demand for commodities is already causing extensive trauma to local contractors and suppliers, many of whom cannot survive the situation for long.
ABARE's executive director, Dr Brian Fisher, has projected Australia's total commodity exports at $61.4 billion in 2004 - 6% lower than in 1998-99. The minerals and energy component would fall 10% to $36.3 billion in the next 15 months, after which a slow recovery was currently forecast, Mr Fisher said.
HOPES FOR IRON
In February WA Resource Development Minister Colin Barnett conceded to the annual Iron and Steel Forum that "an 8% fall in shipment levels from last year will be compounded by the 11% decrease in iron ore prices for fiscal year 1999, the result of negotiations with Japanese steel mill customers."
Mr Barnett went on to say that the longer-term outlook for the State's iron ore industry would likely see world steel production grow at stronger levels than in the past 20 years. He related this to forecasts of demand growth in our most advantageous market, the Asia-Pacific region.
It is a fact that, from 1977-97, pig-iron production increased by 90% in Asia while substantially decreasing in Europe and America. Asia's share of world production increased from 26.3% in 1977 to 45.3% in 1997. The trend is bound to continue when the currency crisis is overcome, but there is no evidence that this will happen inside the next two years.
Scrap metal recycling is a growing force. In the US, ferrous scrap often constitutes as much as 7% of the blast furnace burden. Scrap is also used in steelmaking and in iron and steel foundries. Mr Peter Netchaef of Simsmetal told ABARE's Outlook 99 conference in March that the metal recycling industry was now truly global, with well established systems in mature economies providing world markets with recyclable material.
Australian export earnings from copper, zinc and lead are projected to increase by over 25% between 1998-99 and 2002-03, reaching $3.6 billion, according to ABARE's base metals analyst Mr Ian Haine.
The Murrin Murrin project has proclaimed its viability in terms of low production cost (less than US$1 per pound of nickel). However, the commencing feasibility study contemplated a market price of US$6 per pound by 2000, whereas the current price is around US$2.30, having recovered from a low point of $1.89 in November, 1998.
Mr Adrian Griffin of Preston Resources and Mr Ken Hellsten of Centaur Mining and Exploration Ltd told the Outlook 99 conference that Australia's three new nickel projects were indeed setting new world standards in technology and cost-efficiency.
However, Mr Doug Upton of HSBC Securities, London, sounded a note of caution, commenting that 'the nickel industry is facing the possibility of a sea-change in production technology and, as a result, prices'. He said delays and problems in commissioning pointed to risks in achieving targeted levels of output and costs. There was a possibility that 'one or more of the projects could fail if cost over-runs exceed the financial capability of the operators'.
Nickel will be in oversupply for at least 4 or 5 years because of mine and smelter capacity additions in Canada, Indonesia, and Venezuela, as well as Australia. The large Canadian mill at Voisey's Bay is scheduled to begin production in 2002.
When nickel fell below US$1.95 in August, 1998, exports of cathode and stainless steel scrap from Russia to the European Union were thought to have contributed to the oversupply situation.
While demand for stainless steel remains the chief prospect for nickel, a potentially large new market is emerging with mass production of electric and hybrid petrol/electric cars . Manufacture of batteries using nickel is proceeding in Japan as well as in Europe and the USA.
Economists studying the damaging rampage of speculative investments which crippled much of Asia, Japan, Russia and South America have identified bad banking practices and lack of restraint as major causes.
Predictions by Federal Reserve chairman Alan Greenspan and others that the US stockmarket is a bubble waiting to burst have yet to be vindicated. However, as in Australia, the US investment market has been bolstered by a big influx of new 'mums and dads' investors and retirement savings.
The Wall Street Journal has reported that the 11members of the European Monetary Union have returned inflation-adjusted annualized growth in fourth quarter gross domestic product of just 0.2 percent. This led analysts to fear that the European bulwark of US exports was crumbling.
Now, at the prompting of Bill Clinton and French President Jacques Chirac, the International Monetary Fund (IMF) is expected to sell up to 10% of its 100 million ounces of gold to finance a U.S. scheme to alleviate the debt burden of African countries. The news caused the benchmark April gold contract to plunge US$3.70 to $283.90 per ounce.
A 'millennium round' of talks about trade liberalisation is being planned in the World Trade Organization (WTO), possibly to commence in January 2000. The failure of related negotiations last year in the Organisation for Economic Cooperation and Development (OECD) has made it likely that the WTO will give fuller consideration to the social, consumer and Third World implications of trade policy than has been done to date.
Lessons learned from the current economic crises could therefore result in differential treatment of speculative capital flows as against longer-term foreign direct investment, with obvious benefits for commodity sales.