What a Year!!!!
Rob Davies
minesite.com
The year 2008 will be remembered for many things. Even though it included some of the wildest gyration in base metal prices it is more likely that the year will be stand out for the collapse of the investment banking business model, the election of Barack Obama and the beginning of a nasty, and possibly long global recession or maybe even depression.
Although the year started with the knowledge that economies were probably already running at peak levels and observers were predicting lower metal prices and activity in 2008, the full scale of the rout in the final quarter took everyone by surprise. After all HSBC had warned two years ago that it was experiencing some problems with sub-prime mortgages and Northern Rock collapsed at the end of the third quarter in 2007. But it wasn’t until the investment bank Bear Stearns was forced into the arms of J P Morgan at the end of the first quarter of 2008 that the realisation began to spread that this was becoming a major banking crisis.
Depending on which metal you look at it was about then that prices started to sell-off in a significant fashion. Lead peaked at US$3,400 a tonne in mid-March, bit it wasn’t until July that copper reached its climax of nearly US$9,000 a tonne. Nickel had already peaked in 2007 so it was on a downward trajectory throughout 2008. Nevertheless, a peak for the year of US$33,000 in March is hard to credit now. Aluminium was a late developer and didn’t reach its prime of nearly US$3,300 a tonne until late June. Zinc spent all 2007 drifting down from the peak it had reached at the end of 2006. It too though reached its high for 2008 of US$2,800 in March. By the summer all the metals were in decline but not dramatically so. It was the global financial tsunami in September that saw the demise of Lehman Brothers, the fire sale of Merrill Lynch, the collapse of Freddie Mac, Fannie Mae, AIG, most of the British banks, oh and the implosion of Iceland that turned the sell-off in metals into a rout.
All metals took a significant step down in the autumn with copper losing US$3,000 in a matter of weeks, nickel dropped US$10,000 in two months and lead dropped US$800 a tonne over the period. It was the complete evaporation of credit and liquidity that triggered the final sell-off but leading up to it there were clear signs that demand was already flagging. An earthquake in China just before the Olympic Games construction frenzy ended suddenly reduced that country’s appetite for raw materials. Then, finally, the lack of availability of consumer credit abruptly hit key end markets for metals, such as cars and white goods. That caused deep panic about the very survival of giants like GM, Ford and Chrysler and kept downward pressure on commodities right through until the end of the year.
During this tumultuous year the mining industry played its part in adding to the fervour. It started with the ongoing bid for Rio Tinto from Billiton and Xstrata added to it by trying to seduce Vale into an outrageous offer. Fortunately for the Brazilians the Swiss were too greedy and that made it easier for them to walk in what must be one the greatest escapes since Stalag Luft III. Now trading at £6 a share the Brazilians were being asked to pay a premium to the then price of £40 a share. It does show though that few people have read this commodity cycle better than Mick Davis. It is unfortunate for him and his shareholders that he could not consummate what would have been one of the best endings to a short but brilliant corporate life history ever. His role in consolidating the industry has been a major factor in bringing much needed financial discipline to mining and should make it much easier for the industry to survive the downturn.
The sharpness of the decline has surprised even seasoned industry observers. However, it is usually the case in almost all asset classes that prices go down much faster than they go up. Indeed, one market maker with whom this writer used to work on a gold equity desk said he always aimed to run a book that was a net short in a small way. He said if anything surprising happened it was always easier to buy to cover his position rather to sell in order to square his book. One good thing about the speed of the price collapse is that miners have not had to spend long wondering how to respond. Such has been the scale of the decline that decisions on closures have been fairly obvious.
Aluminium production has been cut back by about 8 per cent, and all the other metals save copper have experienced voluntary, and in some cases, involuntary closures. So far that has prevented inventory levels rising appreciably. Given that the downturn has only just started it will be interesting to see if producers are able to close capacity as rapidly as demand falls. What is noticeable is that because of the industry consolidation the four remaining super-miners have the balance sheets and management resolve to cut production early. It is unlikely that MIM of old would have decided to cut coal production at Oakey Creek by 50 per cent so soon. That is a decision Xstrata can afford to take because it only represents a fraction of its total business.
Final prices are not yet through for 2008, but we have a pretty fair idea at this late stage of what they will be. Aluminium will average about US$2,700 a tonne which is actually an increase on the US$2,638 recorded for 2006. It is though a long way from the current spot price of US$1,500 a tonne. Copper will most likely have an average price of US$7,500 a tonne. Again, like aluminium, this is higher than the previous year of US$7,125. Even that is well over twice the current price. Nickel was already on its way down from the giddy average of US$37,220 a tonne recorded in 2007. So this year’s average of US$22,050 is perhaps less of a surprise, even though that is twice the current spot price. Zinc too will record a lower average in 2008, about US$1,990 a tonne, than the average level of US$3,240 in 2007. The current spot price is US$1,000 a tonne. Lead, its sister metal, has had a gentler decline from US$2,594 in 2007 to US$2,230 in 2008 and it is trading in a similar band at US$905 a tonne. For the sake of completeness we should note that tin averaged US$14,528 in 2007 and its average for 2008 will be US19,600 a tonne. Today its spot price is US$10,000.
Our headline looking forward last year was “Lower, but not much”. In the event it was actually a bit too conservative, as three metals had higher averages than the previous year. The reality though was that 2008 was the year the commodity boom stopped … and how. |
