Government initiatives alter trade patterns

Market players are having a tough time steering their way through economic minefields in Western and former east bloc waters.

The problems appear to have little to do with physical markets, where demand is actually positive, but a lot to do with government initiatives in trade actions, social legislation, finance and currency adjustments. As governments around the world pass new legislation at unprecedented rates and grasp at new sources of tax revenue, avoidance reaction is swift and usually to the detriment of the local economy as miners, manufacturers, suppliers and customers alter trading patterns.

Statements that “we need the money now” find little sympathy and competing economies who move to accommodate such distortions can reap enormous benefits. For example:

* Significant quantities of semi-finished steel coil are now imported into Canada rather than melted in blast furnaces from domestic iron ores. * Countries such as Chile have designed tax codes to attract Canadian mining companies.

* Complicated regulations and high tipping fees are pushing large quantities of industrial metal waste and associated monies to U.S. processors and landfills.

* High-energy taxes on oil are causing goods to be transported on U.S. carriers and roads wherever possible.

* High taxes on air tickets are causing a move into U.S. border cities for cheaper fares.

* Unreasonable taxes on alcohol are resulting in the closure of an increasing number of distilleries across the country.

* Despite 20-30% vacancy levels (not seen in decades), the tax load on small industrial units in the Toronto area far exceeds that tolerated on residential real estate of similar value.

* Wage rates in the executive ranks of many public companies are soaring to levels undreamt of a few years ago. (This is perhaps an omen of inflationary things to come.)

The startling fact is that consumption in these affected industries is being supplied more and more by non-Canadian sources, both legally and by smugglers. Many domestic manufacturers and miners are now able to survive only by exporting their goods and services. The strategy of encouraging exports and discouraging domestic markets with high taxes affects employment, future capital investment and currency flows.

Similar events are unfolding in Europe, where incentives to relocate are even higher for some industries. Nearby countries with large, well-educated workforces, such as Turkey, are the main beneficiaries. For the same reasons, members of the Commonwealth of Independent States (CIS) and East European countries can now be expected to show exceptional growth.

Back in Canada, amid recession and consumer tax resistance, the industries mentioned above are, at best, treading water. Consumption from domestic production in most metal products is softer, although populations have grown. In base metals, good physical trade kept most prices stable. Three factors — an apparent drop in CIS nickel shipments, the threat of labor disruption this summer in Sudbury (at Inco and Falconbridge) and good physical demand — served to steady prices on the London Metal Exchange (LME). The following is a summary of LME prices and stocks for April to date, with last month’s figures shown in parentheses.

Nickel is selling for US$2.50 (US$2.53) per lb., while inventories have increased only slightly to 136,482 (136,284) tonnes. Nickel producers are reported to remain fully sold and any disruption in Sudbury, Norilsk or South Africa would affect the LME stocks and rapidly alter prices. Consumers have reluctantly begun buying cobalt above US$20 per lb., keeping April prices for high-quality Western brands at US$26 (US$26) and Russian products at US$22 (US$22).

Falling concentrate availability together with rising inventories are keeping lead prices balanced at US20 cents (US20.5 cents) per lb. as stocks increased again, to 336,075 (334,800) tonnes.

With no serious refinery cutbacks on the horizon, zinc stocks surged to 1.1 million tonnes (little changed from last month) as prices hovered at US42.3 cents (US42.5 cents) per lb., supported, as with many other metals, by recent producer-investor-fund trading.

Steadily improving consumer demand, particularly in the U.S., kept copper prices firm at US85 cents (US86.9 cents) per lb. as the combination of inventories on the LME and the Commodity Exchange of New York declined again, to 527,004 (543,941) tonnes.

Improving demand and Chinese shipping delays are putting pressure on molybdenum markets. Oxide prices moved ahead slightly, to US$2.90-3 (US$2.80) per lb., despite the added production expected from U.S. producers in the second quarter.

In precious metals, the looming election in South Africa remains the chief concern of investors, speculators and consumers. At this point, the African National Congress is expected to lead in the elections, with the support of moderates, including most white parties. Unfortunately, the desire of the Zulu-based group for self-government bodes ill for civil peace, at least in the short term.

As a result, gold prices remain in a narrow range at US$382.17 (US$384.18) per oz. and platinum group metals are bubbling. Platinum has reached US$403.57 (US$400.29) per oz. and palladium is steady at US$133.28 (US$133.07) per oz. Still reflecting a surplus and concern about auto companies switching to all-palladium catalysts, rhodium was down again, to US$700 (US$730) per oz. Consolidating after its long run-up, and so far continuing to confirm its bull market, silver steadied at US$5.43 (US$5.44) per oz.

— Jack Dupuis is a metals agent, broker and consultant specializing in the marketing of mining properties.