Metal Markets Production moves in line with demand

Higher metals and other commodity prices will produce a major turnaround in corporate profits in key resource sectors, benefiting nicely the Canadian economy, Scotiabank reports in a commodity market update.

The bank’s metals and minerals price index has jumped 34% during the past three months and is almost 11% higher than a year ago.

“This surge in industrial metal prices reflects tighter supply in the face of slowly growing world demand. The mine closures and smelter rationalization of the past five years have finally brought world production into line with demand,” says the bank.

High metal inventories which grew after the 1982 recession are no more, and prices have risen as demand has grown and international economic growth has slowed.

Merchants began to withhold supplies of primary metals and scrap near the beginning of 1987 in anticipation of higher prices, while manufacturers with just-in-time inventory systems are restocking as delivery times lengthen.

Higher prices have brought about inflation-hedge buying by Japanese trading houses and international investors, says the bank. Based on their performance during the past six months, metal prices have jumped at a 25% annual rate.

While prices traditionally fall back in late summer, the bank foresees a better autumn and “a modest further advance” likely in 1988. The bank cautions most producers with closed mines will want proof of a lasting price recovery before reopening the mines.

In addition to metals and minerals, the bank’s commodity market update contains comments on forest products, oil and natural gas, and agriculture. Metals cycle

Meanwhile, the firm Brown, Baldwin, Nisker, in a recent report, talks of commodity prices entering the initial stage of the traditional “end of cycle rally” where metal prices may produce some huge gains.

“In an end of cycle rally, aluminum and copper are usually the first metals to rise, followed by lead and zinc with nickel rallying last. In aluminum, we see signs that production is running at 94-95% of total capacity and demand is increasing. The net effect is a perfect environment to send spot aluminum prices up through $1 per lb,” says the report.

“Copper is in a similar situation to aluminum, although idle production capacity still exists. We believe this over-capacity will remain until operators are convinced prices will be sustained at 90 cents -$1 for some time. However, over the next 6-12 months, copper prices are expected to rally sharply as inventories continue to decline.”

Brown, Baldwin, Nisker says the strong-price phase of the last two metals cycles occurred in 1973 and 1979. The cycles generally take the form of prices falling sharply through a recession, fluctuating during the recovery phase (but remaining essentially flat) and gaining strength again over a relatively short period of time.