Metals Remain Solid Amid Global Turbulence

Uncertainty and volatility are the order of the day in the commodities markets, although the strong underlying demand trend provides some comfort for mining nations.

Gold

Confidence is still wafer thin in global markets as concerns abound about the US economy, the Eurozone and the possibility of further monetary easing in the offing. The Federal Reserve’s announcement of the $400bn Operation Twist stimulus package left markets underwhelmed and a tightening up of interbank lending in Europe reflects the nervousness surrounding sovereign debt and a feeling that a satisfactory resolution of the euro crisis is, as yet, far from assured.

Despite this, for the first time, gold’s status as the ultimate safe haven has been called into question. Record nominal prices had risen precipitously from around $1,500/oz at the start of July to a record nominal high of $1,920.30/oz on 6th September. The dramatic ebb and flow of the markets – which had hitherto only served to drive prices higher – suddenly seized a new victim as the yellow metal suffered its sharpest fall in 30 years, down around 20% to $1,534/oz before slightly recovering.

The nominal high, as has been widely noted, is still well below the approximately $2,500/oz gold price high of 1980 equivalent in 2011 dollars. Indeed, in June Standard Chartered Bank issued a report arguing that gold may even rise as far as $5,000/oz by 2020.

The basis for this claim is supply constraints, central bank buying and increased demand from China and India. China, for instance has only 1.8% of its vast reserves in gold. A move by China to hold the global average of 11% of its reserves in gold would take 6,000t or two whole years of global production.

However, there is a question mark over whether gold prices will sustain their extraordinary rally. Razia Khan of Standard Chartered observes of gold prices that “it is really the absence of attractive alternatives. It’s the need for a safe haven that has been driving all of the demand. You always think ‘If things were to stabilise, what would be the rationale for prices being around this high?’. You would need to see a lot more in the way of inflation to drive further gains.”

At present, investors have been moving out of gold and into dollars. Some are taking profits, others need the cash to cover positions elsewhere. Nevertheless, in the absence of sustained good news, gold prices are unlikely to stage too heavy a retreat from this point.

African Barrick Gold, owner of four mines in Tanzania, has said that production, currently at 700,000oz per year, will rise to 1m oz by 2014 and 2m oz by 2024.

AngloGold Ashanti is Africa’s largest producer, mining 4.52m oz last year. The company announced record adjusted headline earnings of $342m in the second quarter. The company eliminated its hedge book in October, indicating it is bullish as regards price development. It is looking to expand production by 1m oz to 5.5m oz by 2014-2015.

Randgold Resources has been one of the strongest performing gold equities this year. First half profits rose from $68m to $197m. Stockpiles (built up during the political crisis) at its Tongon mine in Côte d’Ivoire have been sold over the second quarter. Its new mine in Mali is now online, although heavy rainfall has led to a downward revision of the production forecast, from around 770,00oz to around 750,000oz. The company’s Kibali project to exploit the Democratic Republic of Congo’s largest resource, in a joint venture with AngloGoldAshanti is proceeding; although analysts do not expect progress to be easy there.

SSC Mandarin of Hong Kong’s takeoever of Pamodzi Gold’s Orkney gold mine, which was in liquidation in South Africa, for R150m ($19m) has been approved.

Copper

Long considered the bellwether commodity as regards the economic health of the global economy, it has been a challenging time for copper. In the face of fears of a possible double dip recession, the red metal suffered its sharpest fall since the financial crisis of 2008, down nearly 30% off its nominal high in February of  $10,160/t to its lowest level in a year.

However, with the copper market still in deficit, any big dip is likely to result in restocking by China, buyer of 40% of the world’s copper. Chinese demand for copper rose 2% in the first half of the year. “Supply is likely to be pretty tight going forward, not withstanding the near term volatility based on what’s going on in the market,” observes Razia Khan. The forecast deficit for this year, according to a Reuters poll, fell slightly to 343,150t. Warehouse stocks are around 50% down on the beginning of the year.

Anglo American and Rio Tinto announced at the start of September that they planned to dispose of their 16.8% and 57.7% stakes, respectively, in South Africa’s largest copper producer Palabora. The company, which produces around 80,000t a year, at the time of the bid was valued at $700m but its shares have since fallen around 18%. Insiders have suggested Imerys and S & B Industrial Miners as potential buyers. Palabora is expected to produce until 2016 although the possibility of life at the Limpopo mine being expanded to 2030 is being considered.

Shareholders of Metorex, which mines copper in Zambia and the DRC, have accepted a $1.32bn takeover bid by China’s Jinchuan. The deal must still be confirmed by regulators in South Africa, since Metorex is JSE listed, as well as in the DRC and Zambia. The company’s first half figures showed headline earnings per share up by 155% as production increased 5% to 26,562t.
Zambia as a whole currently produces more than 700,000t of copper per year, the most by any African nation.

Since the election of Michael Sata  as President of Zambia, anxiety has grown about the prospects of Zambia revising its approach to taxing the mining sector. Although Sata has said that he will not introduce a windfall tax, the industry fears any changes may impede the country’s target of producing 1.5m tonnes of copper a year by 2016 – an aim that will require billions in new investment.
Comments made by Sata, in opposition, critical of China have also added to the uncertain atmosphere. Sino-Zambian trade reached $2.5bn last year, up 97% on 2009. The $2bn China has nvested in Zambia makes it the third-largest recipient of Chinese investment in 2010, after South Africa and the UK.

Iron ore and coal

Iron ore prices have proved to be resilient in the face of the September sell off, down only 5%. African Minerals (who mine iron ore at Tonkolili in Sierra Leone) have signed a $1.5bn deal with Shandong Iron & Steel Group, who will take a 25% stake.

Recently listed commodities trader Glencore is thought likely to make a bid for South Africa’s fourth largest coal miner, Optimum Coal. This would improve its access to the vital Richard’s Bay Coal Terminal (RBCT), the largest in the world. Optimum exports 8m of the 63m tonnes that pass through RBCT each year. Glencore is believed to be the largest seaborne coal seller, moving 100m of coal each year, around 11% of global supply.

Outlook

Whilst price movements remain extremely volatile, commodities have weathered the crisis very well and in all but the most dire of circumstances metals look positive. South Africa-based Adrian Macartney of Ernst & Young told African Business: “If we look at the 2008-9 downturn, we saw that commodities in the mining sector were one of the first sectors to come out of it again. There has been enormous demand for commodities. The world is largely looking again at China and how China will continue to consume. They seem to have this voracious appetite for commodities and if you take a really long term view you’ll say that as industrialisation and urbanisation continue, so does the demand for commodities, Particularly things like copper and  the rare earths, tantalum, etc, the demand for those commodities will simply continue. People want to have mobile phones, flat-screen televisions and iPads and other things like that.”

An expanding population, the rebalancing of the global economy to the East and South and the expansion of industrialisation should come as some comfort to mineral-rich African nations at a time of anxiety in global markets.