China and India driving world metal demand

By HARI SUD
Column: Abroad View

Published: April 08, 2008

Toronto, ON, Canada, — Demand for copper, zinc, aluminum, nickel and all other nonferrous metals has scaled new heights in the last four years. Prices have sky-rocketed and traders are turning in huge profits. This demand for 12 years has been driven by China and now also, in the last four years, by India.

India's economy is expanding at 9 percent per year, putting a strain on supply and demand. Copper has seen a five-fold price increase from US$0.75 a pound in 2003 to $3.75 a pound in February, 2008. Zinc, which was $0.40 a pound in 2003, now sells at $1.70 a pound. Nickel prices have escalated six fold. The same is true of other metals.

In comparison, hot rolled steel, which is the backbone of all industrial and construction activity, has only doubled in price from about US$340 a ton in 2003 to about $700 a ton in 2008. Only specialty steel prices have risen much higher. The reason is that iron ore is abundant, and most countries have built steel mills of their own. Nonferrous metal ores are scarcer; hence producers can cut production and wait for shortages to develop, followed by price increases.

Much of this is related to the building of new infrastructure by both China and India. China has already spent US$1 trillion on infrastructure, and will spend another $50 billion a year for the next 15 years. India began in earnest to rebuild its infrastructure six years ago. Initial investment was low, but in the last four years about $50 billion has been invested. Plans are already afoot to spend at the rate of $30-$40 billion a year for the next 10 years.

China's furious infrastructure building is all based on its trillion-dollar exports, which have brought a huge inflow of capital from the United States and Europe. Indian exports are low, hence India is financing its infrastructure building by borrowed money, some exports, foreign exchange earned via remittances and software and business process outsourcing services.

Nevertheless, both countries are building infrastructure furiously. The worldwide material production needed for this building is not keeping pace. Mines which were operating at 70 to 75 percent capacity five years ago are running at full load and still unable to meet the demand. Future factory production is being sold today, as there is little inventory left to sell.

India and China are not the only culprits. Add to this all of Southeast Asia and a few Middle Eastern counties, and together they are exhausting the supplies.

Demand for specialty metals like cobalt, beryllium, tin, titanium and molybdenum, etc., which are part of the alloy process, is at a peak. Supplies of these metals have been hotly contested, as they have been termed strategic metals. Without these, much of the industrial and military progress of the last 70 years would not have occurred.

Who is supplying all this demand? Supply shortfalls in China and India are met by imports. These two have been strangling the world supply for the past four years. Supply countries like the United States, Canada, Australia and Brazil, and the mines owned by them in Africa, South America, Indonesia, etc., are basking in the high prices.

The Canadian and Australian stock markets, which are heavily resource-based, have scaled new heights. Current metal prices and their bright future are resulting in new mines being planned or existing mines being expanded.

Realizing good times ahead, big mining operations have announced mergers; for example, the world's No. 1 miner, BHP, announced last November an offer for Rio Tinto. The deal is worth US$140 billion. Another deal of similar magnitude could happen between Brazilian mining giant Vale and Anglo-Swiss Xstrata. All these companies operate internationally with mines across the globe. They are the backbone of much of the world's nonferrous metal supply.

Canada is presently preoccupied with expanding production of precious metals like gold and silver, and other high-value mining. It has invested heavily in diamond mines and strategic materials like uranium. Canada is also the backbone of nickel, aluminum, zinc, titanium and uranium production. Canada produces one-third of the world's supply of zinc and titanium, one-fourth of the world's supply of aluminum, copper, lead, gold and silver, and is a leading supplier of nickel and uranium.

An average mine in India takes four to six years to come on stream if approvals and financing are speedily arranged. Another hold-up for accelerated development of this sector is a lack of foreign direct investment. A new mining policy in 2008 may make foreign investment in India's mining sector easier.

In India, 80 percent of mining activity is coal-related. The rest is related to metals and minerals. India's deficiency in nonferrous metals is the direct result of a lack of commercial ore bodies and investment. Although bauxite and manganese are found in abundance, aluminum production is just about in sync with demand. With its large ore bodies, India should be a world leader in aluminum production.

India is not doing well in any of the other specialized nonferrous metals either, or strategic fissile materials like uranium. There are no large-scale deposits of nickel or other such metals. Also, a lack of local supplies of fissile material is driving India to seek a nuclear deal with the United States. Gold, the social security of the Indian masses, is not mined in India in a big way; it is 99.99 percent imported. This is true of diamonds and other precious stones also.

In the iron and steel category India is a lowball producer, with 54 million tons a year. The bulk of its steel is produced through the outdated open-hearth process, adding to its high cost and low quality. Demand is growing at 14 to 15 percent per year, but production is growing at only 5 to 6 percent, forcing India to import. Newer production mills slated to come on stream in five to seven years will add another 45 million tons of capacity. At that time production and supply will balance.

As for China, it is king in iron and steel production. At 480 million tons, it is the largest producer. About 50 percent of this production goes into domestic usage; the remaining 50 percent ends up in manufactured products exported to the rest of the world. Hence its high production and usage figures are a bit deceptive. This is true for a lot of other metals also. Consumption is driven by export demand.

China is key to the world's copper demand; its local production cannot keep up with the demand. A deficit of about 700,000 tons in 2006-07 drove the world commodity markets crazy. Today's high copper prices are directly attributable to the huge supply-demand gap in China.

Aluminum demand in China has been red hot since 2004-05. By 2007, with new smelters on line, the supply situation eased a bit. China is now importing bauxite from India and Indonesia and refining it to aluminum, easing the situation a bit.

Nickel is the key ingredient for stainless steel production. China imports nickel ore mostly from the Philippines and smelts it into metal. Canada fills China's remaining metal supply gap. This supply situation is unlikely to change, since China has no large-scale ore deposits.

In summary, China and India are short on minerals and nonferrous metals in a big way. The gap is now filled with imports. The Chinese have a lot more money at their disposal; hence they can afford to pay inflated prices. Producers are glad that China and India are in the market. They do not realize that products exported by China and India will ultimately reflect these high prices.

--

(Hari Sud is a retired vice president of C-I-L Inc., a former investment strategies analyst and international relations manager. A graduate of Punjab University and the University of Missouri, he has lived in Canada for the past 34 years. ©Copyright Hari Sud.)