The prices of economically sensitive industrial metals such as nickel, aluminium, iron ore and copper have dropped dramatically over the past year. Nickel is at a three-year low of $15,450 a tonne, says Jack Farchy in the Financial Times. Aluminium, used in the aircraft and car manufacturing industries, is down 20% since March to $1,899 a tonne – nearing its 2009 lows.
“The recent weakness is much more pronounced than the previous ‘corrections’,” says Puru Saxena on Kitco.com. If producers’ margins continue to be squeezed, miners may be forced to cut output to support prices. The share price of Anglo American, one of the world’s top-ten nickel producers, fell by 5% after it reported lacklustre results last week, while Svein Richard Brandtzaeg, CEO of aluminium producer Norsk Hydro, told the FT that the current “extremely low” aluminium prices make it “impossible” for the sector to “deliver a decent return”.
The slide boils down to China. As well as accounting for much of global metal demand, the country is also the “most important swing supplier in most metals markets”, says the FT. To support aluminium producers, for example, the authorities have cut electricity prices. That lowers costs for local producers, so they can afford to maintain output even at lower prices. This in turn puts further downward pressure on end prices.
More fundamentally, while China may only account for 10% of world GDP, says Sean Corrigan at Diapason Commodities Management, “it is currently responsible for 40%-50% of total, worldwide consumption across a whole spectrum of industrial commodities”. As for coal, oil, and iron ore, it has “gobbled up more than 100% of the incremental rise in their use over the past four, post-Lehman years”, he notes. Forget a hard landing – even a “slowing” in China “can’t fail to have an impact” on commodity prices and the mining sector. After all, it’s unlikely that the West will be in a position to take up the slack anytime soon.