EDITORIAL PAGE — Base metals await recovery

It’s nail-biting time for the base metal miners of this country. The big three metals — copper, nickel and zinc — are in deep troughs. Copper, for example, is bumping what miners pray is bottom at US80 cents. Nickel continues to slouch along at $2.67. And zinc is trading at 45 cents per lb.

Heading into 1993, there were hopes that a U.S.-led economic recovery would breed an uptick in the Canadian resource sector. The first-quarter rise in the Toronto Stock Exchange 300 Composite Index seemed to confirm that investors were betting on a resource recovery. The TSE 300 bounced to a 3-year high on record volume and lately seems poised to assault an all-time high near 4100.

However, as various commentators have pointed out, the market’s climb came on the strength of three sectors — gold, oil and gas, and forest stocks. The wild speculative frenzy in diamond stocks, we suspect, played a part as well. Meanwhile, the shares of most of the metal mines have been left eating the dust of the golds and oil and gas issues. Of course, there are always exceptions and this time around it’s Noranda Inc., which recently posted a 52-week high.

But few people expect a recovery in the base metal sector just yet. Beyond the deteriorating fundamentals of supply and demand for the metals, there is growing alarm that the bloom is off the recovery rose — at least temporarily — as far as the U.S. economy is concerned.

According to Metal Bulletin, there was a first-quarter boom in U.S. steel orders, a good indicator of economic expansion. However, weakening sales in autos and heavy equipment and a dip in construction activity suggest this might have been a boomlet. The publication concludes the U.S. economic recovery is anemic.

Other telltale signs include a 1% decline during March in the index of leading indicators, the U.S. government’s main economic weather vane, and a drop in another index, this one put out by the country’s purchasing managers. The fact is the U.S. gross domestic product expanded at a sluggish 1.8% annual rate in the three months from January through March — less than half the 4.7% growth rate in the fourth quarter of 1992. Add to the bearish scenario developing south of the border the performance of Germany (weak) and most of the rest of Europe (weaker) and optimism — on the demand side for base metals — is rather difficult to muster.

In terms of supply, the metals might be heading for a shakeout. For copper, the many Chilean projects coming on-stream do not suggest supply difficulties in the near-term. Canadian nickel producers, meanwhile, struggle with Russian nickel exports. And in zinc, London Metal Exchange stocks just keep rising. Metals analyst John Lydall of First Marathon Securities figures there is “a possibility of a `meltdown’ in one or more of the metals markets” unless economic activity picks up. On a positive note, zinc producers have recently shown the courage to cut production. The latest producer, after both Cominco and Metallgesellschaft cut output, was Noranda.

We can expect more such actions until a real economic recovery takes hold.