METAL MARKETS Base metals to pump industry profits

Base metal prices will on average be some 25% higher next year than in 1986, boosting mining industry profits substantially in North America, the latest Metals Analysis and Outlook publication from London, England, forecasts.

The authors note that despite the slowdown in world economic growth, base metals rose by an average 2.8% last year, or twice as rapidly as the increase in industrial output for the Organization of Economic Co-operation and Development (oecd) region.

They contend that in part the rise in metals demand reflects an underlying longer-term upward trend for metals previously subject to damaging substitution or simple phasing out in some previously important end uses, for example, in the case of zinc and lead. It also signals that the move to “just-in- time” inventory management, which undermined metals demand from 1982 on, has now reached a practical limit.

The authors weren’t surprised that the current run-up in metal prices has coincided with historically low inventory cover (stocks as a ratio of concurrent demand) and declining real interest rates. Improved demand

On the basis of a projected increase in oecd industrial production averaging some 2.5% for 1987 and 1988, the report forecasts continuing improvement in metals demand and a sustained decline in inventory cover. According to the authors, inventory cover by the end of 1988 is likely to be l ower than at any time since the 1973-74 commodity boom.

Average base metal prices next year would have to do no more than equate to recent “highs” to achieve the projected 25% increase over 1986. Given the authors demand and inventory projections and an assumption of a further, albeit modest, depreciation in the U.S. dollar, they consider this a realistic price expectation.

While U.S. miners will gain, metal producers in Japan and Europe will fare relatively poorly because of their “strong” currencies. The report forecasts that domestic prices in Japan and Europe in 1988 will show little difference from those of 1986 and will be 30% and 20%, respectively, below 1985 domestic levels. Plant reactivations

The authors don’t anticipate widespread metal-producing plant reactivations in the near term. They are, however, concerned that this could begin to undermine prices towards the end of 1988. Excluding tin, one-third to half all currently idled base metals production capacity is located in North America, the region which will experience the best domestic price gains.

On an individual metals basis, the authors are projecting significantly better than average aluminum, nickel and tin prices next year and they also expect to see some gains in average lead and zinc prices. They are concerned, however, that rising conventional mine production and the explosive growth of low-cost leaching of old dumps and oxide ores will undermine the copper price.

As for precious metals, the authors see the potential for higher prices but on a short-term basis, similar to 1980. As inflation rises (and falls), so does investor interest (and disinterest) in gold. The authors suggest precious metals could be entering the most volatile phase of the on-going bull market.