Metals continue their golden run

Peter V O'Brien

Friday 30th January 2004

International prices for industrial metals have risen strongly since The National Business Review considered their trends on September 12.

The increases had an effect in real terms on New Zealand importers and manufacturers unless they had hedges against the US dollar, because price movements for metals since the end of 2002 were greater than the New Zealand's dollar's gain against the US currency, as shown in the table.

People who speculated in the markets on likely price rises did well over the period. Those who had to use actual metal in manufacturing processes faced linked pressures which affected prices.

The deterioration of the US dollar was only one factor. Apart from the movement in relation to our currency, which is included in the table, the US dollar declined 21.4% against the euro between the end of 2002 and last Friday. It fell 13% from September 12 to January 23, proportionately more than in the first nine months of 2003.

A similar trend was seen in the US dollar's relationship to the yen over the same periods. The fall was 1.4% from the end of 2002 to September 12 and 9.3% from the latter date to January 23.

The euro and the yen, the world's major currencies after the US dollar, moved less than metal prices, so there were other reasons for the balance of price changes.

(Currency movements were still important, as shown last week, when metal prices declined slightly when the US dollar regained ground against other currencies.)

The NBR discussion in September noted comments of Rio Tinto chief executive Leigh Clifford to an address to the Securities Institute of Australia in August. He said demand then was flat from traditional markets like Europe, the US and Japan, while Asia and particularly China were "bounding along."

Demand for minerals continued to increase and should accelerate with a recovery in western economies.

The BHP Billiton annual meeting was held on November 13, three months after Clifford's speech. Chairman Don Argus said the company was seeing some strengthening in the US market, which it expected to continue at least in the short-term, but the European economy remained flat.

He noted the Japanese economy had expanded for six successive quarters.

"Strengthening domestic demand in Japan, combined with strong growth in the Asian region, including China, should support a continuation of the modest recovery."

BHP Billiton was confident about continuing strong demand from China and had the reserves and infrastructure capacity to meet it.

Argus also referred to the "booming Chinese demand for iron ore," somewhat lavish language from one in such a position but therefore all the more noteworthy. The company had no doubt the Chinese demand for commodities would broaden beyond iron ore and alumina.

"In fact, it would not be surprising if the Chinese demand for nickel and other stainless-steel components increases beyond general expectations."

Argus said the global economic situation remained "tough," although there had been (in November) a recent rally in commodity prices, particularly in nickel, copper and oil. That rally was reflected in price movements from September to last week, shown in the table.

Price improvements for industrial metals over the past 13 months were well ahead of the change in the gold price and generally better then silver.

Gold continued to get heavy publicity, often from those with vested interests in higher prices.

There is no need to revisit the arguments for and against pushing up gold prices, except to note a rise to $US500 an ounce would be a 22% gain from the $US409 of January 23 and 44% above the price at the end of 2002.

The latter percentage would be less than those achieved for copper, lead, nickel and tin in 13 months.

Gold is sexy; base metals, aluminium, nickel and tin are less attractive.

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