Last autumn the Economist index of non-ferrous metals plunged from almost 150 to 120 (1985 was 100) and Phillip Crowson, chief economist of RTZ, the biggest mining company in the world, said: 'Prices are unlikely to depart from their present trading ranges until late in the year at best.' Last autumn's slide was caused by the belated onset of realism about economic prospects, along with the unwinding of some speculative positions, he said.
Despite being thoroughly gloomy about metal prices for the rest of the year, Mr Crowson is surprisingly optimistic about the speed of recovery thereafter. Looking at aluminium, copper and zinc, he has compared various aspects of the current downturn with earlier downturns, and concludes that the industry is much healthier than it was then.
First, he says, it is not under the same cost pressures. Margins are much higher than they were in the early Eighties, at least for the efficient producers. High-cost plants have been closed down, technical changes have kept cost rises down (especially in copper), as have changes in working practices. Restrictive labour practices have been forced out of the Australian iron ore industry, for example. 'Margins have deteriorated in this recession, but not to anything like the misery of the early 1980s,' he says.
Second, stocks are lower than they were in the 1975 and 1982 recessions. In 1975 world copper stocks amounted to 35 weeks' consumption; last year they were the equivalent of just five weeks. When the economy turns up, these stocks will rapidly be run down, putting upward pressure on prices.
Third, capacity utilisation in the processing industry has remained relatively high. Aluminium smelters were operating at 80 per cent capacity in 1975, 74 per cent in 1982, and 93 per cent last year. There is a similar story for copper and zinc: little slack has to be taken up before price pressures re-emerge.
Mr Crowson backs this up by demonstrating that supply and demand are in better balance than they were in previous downturns. In 1975, Western production of all three metals was well ahead of Western consumption, as capacity continued to build even after the oil crisis had slowed demand for metals. The same was true for copper and zinc in 1982, but by 1986 supply and demand were back in balance. In this recession zinc is virtually in balance, while consumption is running somewhat ahead of supply in aluminium and copper. In other words, even in mid- recession, the price pressure is upward.
Why then are prices so low? The answer lies in the East. Although Western aluminium consumption ran some 400,000 tonnes ahead of production in 1992, net exports from the former Soviet Union were 800,000 tonnes. The current uncertainty in Russia is unlikely to cut them back, not least because a large proportion comes from other republics, notably Kazakhstan.
If Western demand recovers, Mr Crowson believes, these imports will soon be absorbed. 'Most mineral and metal industries are reasonably well-placed to benefit when both Europe and Japan emerge from the recession,' he says.
'Prices should react more quickly than they did in the 1980s, even if the recovery is sluggish and protracted.' In other words, buy your central heating system this year.
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