Base metals may be in freefall - experts

The amount of base metals' supplies, recently removed from the market, has not been sufficient to offset declining demand and boost prices.

Mining production to fall further, experts say

Financial Post

4th December 2008

While the mining industry is scaling back production all over the world, experts think there is still a lot more to come.

Since base metal prices started plummeting in the fall, there have been near-daily announcements of mine closures, production curtailments, and project delays around the world.

Two more were added to the list in the last two days as Vale Inco closed one Sudbury nickel mine and delayed another, while Freeport-McMoran Copper & Gold Inc. announced wide-ranging cuts across its operations.

So far, these moves have been little help for base metal prices, which continue to sink to multi-year lows amid the global economic crisis.

"Things have not stabilized because we have not seen a change in the deceleration of demand," said Terry Ortslan, an independent mining consultant.

As long as demand declines and global inventories grow at breathtaking rates, industry experts expect the vicious cutbacks to continue.

It is a far cry from the last few years when many marginal projects were brought into production on the assumption that rising demand from China could keep the commodity boom alive for years.

The problem for the industry is that despite the many project closures and delays, the amount of supply that has been removed from the market is not enough to offset declining demand and boost prices.

While Vale Inco said Thursday it will shutter its Copper Cliff South mine, the move will remove only 8,000 metric tonnes of nickel from the market. That amounts to barely a blip in a 1.4-million-tonne market.

Even with the vast number of cuts in nickel and zinc, which have been hit hardest of all the metals, only about 5% of output of each commodity has been removed from the market.

"You typically see 25% to 35% of producers losing cash in a down- cycle. I think we're seeing 50% losing cash right now [in nickel and zinc]," said Orest Wowkodaw, an analyst at Canaccord Adams.

It is a sign that many more reductions are still to come.

Cory McPhee, a spokesman for Vale Inco, acknowledged that the company is not seeing the uptick in prices that it would hope for given all the closures. The market shrugged off Vale's Sudbury cuts Thursday and pushed nickel down another 3% to US$4.03 a pound. It topped US$24 a pound in the middle of last year.

"We're announcing moves today that we hope will have an impact. But we don't have a crystal ball for 2009, and further [cutbacks] are entirely possible," he said.

Copper, the flagship base metal, is the only one that has largely avoided the axe so far. But experts said that is about to change.

Copper held up better than other commodities during the downturn because inventories are tighter. But with prices now sinking below US $1.50 a pound, a rash of closures and curtailments is considered inevitable.

"In copper we've only scratched the surface. I think we'll start to see the pain below US$1.50 for a sustained amount of time," Mr. Wowkodaw said.